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Capitalization Tables

Overview

  • Capitalization Tables
  • Ownership
  • History
  • Liquidation Preferences
  • Preferred Stock
  • Participating vs. Non-Participating
  • Review

Thank you for your time.

Are there any questions?

What is a Cap Table?

Ownership Table

  • Display the ownership stakes in a company all in one place

Or

  • Display the history of stocks issued by a company

Ownership Table

Q3 vs Q4

YoY

  • You can quickly see What types of stocks each has as well as How Much of that stock and percent of Ownership

Complexity

While most Cap Tables you encounter will be more complex than this example, the information will be the same:

  • Stakeholders on the x-axis

  • Series of stock issued along the y-axis

  • Depending on the company and even departments within a company other pertinent columns may be included

Complexity

Excel

  • The universality of the program means Cap Tables can be easily provided to third parties

  • Learning basic Excel formulas can save you time and effort in analyzing Cap Table data

Excel

Tips

  • Use the legal name of each shareholder
  • Even if everyone knows the good-natured CEO as "Jack" still record his legal name (in this case John) that is used on the stock, bonds, or options

  • Do not clutter a cap table with extra notes

Simplification

Simplification

Say you have several series of stock issued and bylaws state that for a certain vote you need 3/4 of Series A & B holders to approve.

You may be tempted to merge these into one column for future use

Be cautious! Tangling the information is easy, but if you ever need to UN-tangle it, that is much harder!

History Table

Cap Table History

A Cap Table can also be used to display the features of a particular stock series and how it compares to all the other issues of stock for the company

Example

Example

Stock Information

Stock Information

Dividends

  • Almost all of the important terms found in the stock information revolve around how Dividends will be allocated

  • Dividends are a portion of a company's earning that it distributes to shareholders

  • Does not have to be in cash
  • Property, greater stock options

Dividends

Dividend Rights

Yes!

As the yellow line highlights, Series G stocks will benefit from company dividends

Liquidation Rights

  • Recall that on our first Cap Table our three founders all had common stock while the investors held Series A & B stock (both Preferred Stocks)

  • It is fundamental to understand the difference between preferred stock and common stock

Liquidation Rights

Preferred Stock

  • When venture capitalist put up capital in a business they are almost always compensated in Preferred Stock

  • If the company is ever liquidated (i.e., bankrupt, sold, or even merged): preferred stock holders receive dividends BEFORE common stock holders

Example

Pari Passu

  • In our example, underlined in red, Series G is Pari Passu
  • Latin for "equal footing"

  • It is possible for there to even be a heirarchy among preferred stocks as to who gets their dividends first.

  • In this example, since a Series G holder is on "equal footing" he or she would get dividend payments at the same rate as any other preferred stock

Non-Participating vs. Participating

Preferred stocks have two classes:

  • Non-participating: Only receive the intial preferred dividends

  • Participating: Receives the initial preferred dividends
  • Those shares then ALSO count as common stock and the holder gets a share of the remaining dividends as well

Examples

Non-Participating

  • Steve invests $100 million for half of StartupABC

  • He receives his shares as Non-participating preferred shares, 1x liquidation preference

Sell Price

Sell Price

What happens if ABCStartup does pretty well and is sold for $600 million, or three times its initial value?

Actual Dividends

Steve receives: $300 million

(half of the new valuation)

Common stock holders receive: a split the remaining $300 million based on # of shares each has

Participating

  • Sabrina invests $100 million for half of StartupXYZ

  • She receives her shares as Participating preferred shares, with a 1X liquidation preferrence

Sell Price

Sell Price

What happens if XYZStartup does not do so well and is sold for $150 million, losing 50 million in the process?

Actual Dividends

Sabrina receives: $125 million.

Common stock holders receive: $25 million

How?

  • With a 1X liquidation preferrence Sabrina ensured her $100 million initial investment from any liquidation event before common stock holders

  • As her shares are participating so she now owns half the common stock AFTER she has taken her initial slice

  • Sabrina takes half of the remaing $50 million and ends up with $125 million while all other common stock holder split the remaining $25 million

Why?

Why?

  • Preferred stock gives VCs an added level of security in their investment. Their liability is significantly decreased when they know they will be paid out first

  • Commonly their liquidation preference will be 1X, or equal to their initial investment. In a booming industry it is not unheard of to see 2X or even 3X liquidation preference multiplier

Cap Table History

Balance is key

  • High preferences for investors can encourage greater investment but the founder risks losing out on profiting from his/her endeavors
  • As do employees

  • Large preference imbalances can lead to battling priorities between preferred and common stock holders

Balance

Imbalance

  • If investors have huge liquidation preferences over common stock holders there is a huge "dead space" during a company's growth where selling would net investors huge returns, while common stock holders would get little or nothing.

  • This can create two completely unaligned camps of stock holders on the issue of whether to sell or not

Imbalance

  • Cap Tables offer a key resource in illustrating ownership and involvment in a business and the types of shares it has issued

  • Liquidation preferences determines the order a company's dividends are distributed

  • Startups offer VCs preferred stock as a method of providing more security for their investment

  • Participating preferred stock offer even greater upsides as investors not only get security on their investment but a share of the common stock's profits as well

Review

Example 1

Example 1

  • Cynthia invested 50 million to obtain 25% of Callister Techonologies
  • Participating, 1x Liquidation preference

  • How much would Cynthia's investment be worth if Callister was sold for:
  • 400 million?
  • 100 million?

Answer

  • 400 million valuation
  • Cynthia: 175 million
  • 100 million valuation
  • Cynthia: 62.5 million

Answer

Example 2

  • Darius invested 100 million for 20% of ArkAngel Networks
  • Non-participating, 2X liquidation preference

  • How much would Darius's investment be worth if ArkAngel was later valued at:
  • 1 billion?
  • 400 million?

Example 2

Answer

  • 1 Billion valuation
  • Darius: 200 million
  • 400 million valuation
  • Darius: 200 million

Answer

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