# Cap Tables Explained

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3 So, let s assume you have one investor who puts in the whole \$500K for 33.3% of the company. That leaves the existing, or previous, shareholders with 66.7% of the company (which is 100% minus the new investor s negotiated stake of 33.3%). Sum up the number of existing shareholders shares. Let s say they have a total of 2 million shares. Remember, this number was arbitrary to begin with but becomes important very soon. Also remember this number does not change as new investors come in. With these two numbers (2 million shares = 66.7% of the stock), there are two common calculations to determine how many shares new investors will receive. First, we now know those 2 million shares are worth \$1 million (from the pre-money). This means each share is worth \$.50 (price per share = value/number of shares = \$1M/2M). The new investor coming in with \$500K will thus buy 1 million shares (\$500K/\$.50 price per share). Quick check: Value and/or Investment Price Per Share Shares % of shares (% ownership) Founders Investor \$1,000,000 \$500,000 \$.50 \$.50 2,000,000 1,000, % 33.3% Total \$1,500,000 3,000, % Another common way to calculate these numbers is to take the number of total existing shares (2 million) divided by the founders updated ownership share of the company (66.7%), which equals total shares after investment (3 million). The founders keep the same number of shares (2 million), which means the balance of 1 million goes to the new investor. This investor paid \$500,000 for the 1 million shares, meaning the price per share is \$.50. These are the same value as the first method above. Good. With multiple rounds, investors can continue to invest at the then current price per share to accumulate more and more shares. Imagine an investor who invests \$100,000 in each round. As described above, if the initial round is going at 50 cents a share, this buys 200,000 shares. If, as one would expect, the price per share increases over time to each round as the company becomes more valuable, perhaps their investments and holdings would look like this: Round Investment PPS New Shares Total Shares A \$100,000 \$ , ,000 B \$100,000 \$ , ,333 C \$100,000 \$ , ,333 D \$100,000 \$ , ,333 E \$100,000 \$ , ,333 Total \$500, ,333

7 Note: Compare Pat s investments with the example I used above of an investor that invested \$100,000 in multiple rounds. You can see how Pat accumulated 493,333 shares and stands to gain a lot from a sale of the company or IPO. Summary: This cap table shows a company that has experienced steady growth and successfully raised multiple rounds of investments from about 20 different investors. While each founder started off with a little less than half of the company, they ended up owning only 10 percent of the company. Is this bad? At last valuation, that small piece was worth over \$1.5M. And, if the example of investor Pat is played out and the company is sold at \$20 per share, each founder will earn \$16M. Compare that to Pat s \$10M. This simplified cap table does not include options or warrants, bonuses, vesting schedules, or conversions. These obviously add to the complexity of the cap table and should be discussed with your accountant and/or investors. Because these terms were not included, calculations for fully diluted percentage also were not included, but, as the name implies calculates a shareholder s percent ownership after all possible shares have been issued. This document brought to you in partnership with:

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