Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist, 2nd Edition

The Capitalization Table

Now that we've worked through all of the specific clauses in the term sheet, let's go through how a typical capitalization table (cap table) works. A term sheet will almost always contain a summary cap table, which we describe in this chapter. You, your prospective investors, or occasionally your lawyers will generate a more detailed cap table.

The cap table summarizes who owns what part of the company before and after the financing. This is one area that some founders, especially those who have not been exposed in the past to cap table math, are often uncomfortable with. It's extremely important for founders to understand exactly who owns what part of a company and what the implications are in a potential funding round.

Normally when you initially set up the company, 100 percent will be allocated to the founders and employees, with a specific number of shares allocated to each individual. The question “What will I own if a VC invests X in my company at a Y valuation?” is rarely simple. To answer it, you need to be able to generate a cap table to truly analyze the deal presented by a particular term sheet. Following is a model to work from with a typical example.

Let's assume the following:

2,000,000 shares held by founders before the VC invests

$10 million premoney valuation

$5 million investment by the VC

In this example, the postmoney valuation is ...