Lecture 7 Flashcards
What is a cap table?
Short for capitalization table, its a document that outlines the ownership structure of a company, specifically, the breakdown of equity ownership among investors, founders, and other stakeholders.
After a deal is lost in the sourcing process what will most firms do?
Usually do a post-mortem about why the deals were not successful
Why didn’t you win the deal
Write up and investigate and do a case study at team events to discuss how to improve strategy
Explain the structure of a cap table
Column 1: Position/Relationship to company
SEED ROUND
Column 3: Common Shares
Column 4: SEED Preferred Shares
Column 5: Total Shares
Column 6: Fully Diluted Ownership % =100%
SERIES A
Column 7: ESOP increase
Column 8: Total Shares
–> added ESOP, SEED Preferred, SEED Common
Column 9: Fully Diluted Ownership %
–> Total Shares CEO/Total Shares Overall
Column 10: Series A Preferred Shares
–> old investors purchasing + new investors
Column 11: Total Shares
Column 12: Fully Diluted Ownership %
AT THE BOTTOM
Round Size: Amount raised (Investment)
Pre Money Valuation = amount asking for/percentage of company you are giving up
Post Money Valuation = Investment + Pre Money
Share Price = Equity Value/ # of outstanding shares
Dilution = (New Shares Issued ÷ (Old Shares + New Shares Issued)) x 100
What are examples of why warrants may be issued?
- Incentivizing and attract early stage investors
- Sweeten the deal with potential investors
- Providing additional upside for taking the risk
- delaying the valuation
- Preserve equity and maintain large ownership for future rounds, but have a potential commitment for long-term relationship with investors
What is the payout order on the cap table?
Management team and employees get paid out last
Those that invest later on get paid first (more rights from when you can withdraw funds)
Secured debt take money out on a pro rata basis
All done on a weighted average share price
The people that paid a higher share price means the more right they have to capital
How do you determine preferred payout order stack?
Add up everything x liquidation preference = preference stack
What does fully-diluted ownership mean?
shares are the total common shares of a company counting not only shares that are currently issued and outstanding but also shares that could be claimed through the conversion of convertible preferred stock or through the exercise of outstanding options and warrants.
Was the Seed round a priced round or a SAFE? How can you tell?
- all parties were given common shares upfront
- you don’t have the seed funds getting preferred or common shares during Series A financing but during seed financing
- there was no column that said SAFE
If it had been a SAFE with a valuation cap of $12M post-money instead of a priced round,
how would it have shown up in the cap table?
there would be a section labeled SAFE in the cap table during seed round and another section showing the SAFE conversion into preferred stock. Also there would be no dilution because the shares would be given in Series A round
What is an exit waterfall
Specifies who gets paid out and in what order
● In the case of a positive exit / sale / IPO everyone gets paid so the waterfall is less relevant
● In the case of a liquidation or distressed sale, you need to understand this
○ Employees get paid last
○ Preferred shareholders get paid on a ‘weighted average share price’ basis
■ Those that invest later get more money out (higher share price in later rounds)
What is the general order of exit waterfall, with examples and payout rules?
- Secured Debt (venture debt, working capital financing, credit): pro-rata
- Unsecured Debt (convertible notes, leases, employee severance): pro-rata
- Preferred Shares (liquidation preferences on shares): weighted average share price
- Common Shares (employees, founder, angels): pro-rata
Why should a founder have an updated exit waterfall on their computer at all times?
Most companies keep an updated exit waterfall in their files at all times as it influences behavior and incentives
depending on how the business and market are performing
What is a closing doucment?
Management must sign a letter which means that they have to agree that all information given to investors is truthful, if the investor finds out information later on that wasn’t disclosed and then the founder is liable so the founder will send a list of disclosure before the deal is closed.
How do founders present their ideas to VCs at the seed stage?
Founders will create slide decks that look great that are more built for storytelling and less grounded in truth
Might present a lot of adjusted numbers
Private companies don’t use GAP and don’t get their companies surveyed in the seed round
Uncover how things are calculated –> what went into gross
What is a stock purchase agreement (SPA)?
Outlines the mechanics and structure of
the purchase of stocK
What is an Investor rights agreement (IRA)?
Specifies the specific rights of the investor now that they are part of the company
What is a voting agreement (VA)?
Outlines how the company makes decisions and votes on them
When a deal closes what must management sign?
When a deal closes, management must sign a “management representation letter” which highlights the fact that all
information is truthful, and all disclosures have been made
If anything later on is found or discovered that was not
disclosed, management can be held personally liabl
How does a company keep an investor informed? How does this differ from a board deck?
Most startups produce monthly investor updates for their investor community. This is different from a board deck which would only go to your board of directors.
Why does a company decide to have a monthly investor update newsletter?
Give all your investors frequent updates on the company
● Get help from them (ie put them to work)
● Build trust and credibility
● Force yourself to take a bird’s eye view of the business (it’s helpful to write summaries)
How would a convertible note and SAFE show up in the cap table?
They would not show up in a standard cap table because they do not yet
have any shares
You would model them into a fully-diluted cap table to show the effect of
dilution by assuming they convert at the valuation cap
What are the main input data points required to build a cap table? What primary documents are responsible for providing those data points?
- Share price
- New shares issued
- Breakdown of new shares by investor
- Esop information
Documents: share purchase agreement, term sheet
What is the difference between preferred shares and common shares in how they get paid out?
a. Who are the main owners of common shares?
b. Are all preferred shares worth the same when it comes
to liquidation?
Preferred shares have a liquidation preference that allows them to recover capital ahead of common shares
a. Common shares are owned by founders, employees,
angels
b. Preferred shares are weighted by share price, so the
higher the price paid for the shares, the more they are
worth in a liquidation
Name a few things that would increase the dilution for an
existing investor in a funding round
- Lower valuation
- Higher ESOP top-up pre-round
- Conversion of an outstanding note or SAF
Describe what venture debt is and how it is structured. How would venture debt be treated in a liquidation?
Venture debt is debt for a startup that is secured against the
company’s assets and generally contains some warrants for equity upside to the debtholder. It is treated as a secured creditor at the top of the
Describe the difference between unallocated and allocated
ESOP. When you ‘top up’ the ESOP in a funding round does it
become allocated or unallocated?
Allocated has been given to employees; unallocated is waiting to be given out
Top-up: Unallocate
Who might be the owners of warrants?
Venture debt holders, preferred shareholders
