Know Your Cap Table
Another (important) kind of KYC
As a founder going out to raise capital, your brain is riddled with data points about your business. Revenue. Burn rate. Customers count. Average contract value. Length of your average sales cycle. CAC. All the numbers that investors are likely to dig in with you on as they develop an understanding of your company and evaluate a potential partnership. I’m here to urge you to commit one more set of information to your memory bank: your cap table.
A company’s capitalization table (aka. cap table) is the record of who owns what of your business. This includes investors, founders, employees, advisors, consultants, and anyone else who has been granted shares. To a potential new investor, a cap table is a critical piece of information to understand because it outlines a few things:
Founder ownership: How much of the business does the founding team own? How much is vested / unvested? Or, said differently, how ‘incentivized’ are they to see this business succeed? What is the split of ownership between multiple founders? Are there any departed founders who still have meaningful ownership?
Employee ownership and option pool: How much equity (in the form of an “option pool”) has been set aside to attract talent to the company? And will the option pool need to increase in size (thus resulting in further dilution)?
Investor partners: Who else is in the boat already? How invested are they in the company’s success? As a prospective investor, do I have a prior working relationship with them, and if so, is it a positive or negative relationship?
Financing history: How much money has been invested into the business to date (across both equity as well as any debt you may have taken on)? When? At what valuations or “caps” (if via SAFEs)?
The cap table tells an important part of your fundraising story. As a founder, knowing that story by heart will ensure no one incorrectly fills in any gaps on their own without full context.
This is especially true around total dilution in the context of any SAFEs. If you’ve raised capital over the last few years by “stacking SAFEs” the odds are that you don’t remember all of the nuances of the terms of each SAFE you’ve raised on. And given there are more flavors of SAFE than at Ben & Jerry’s — pre-money or post-money, with a discount or without a discount, with a side letter or not, etc. — it can be confusing to sort it all out. Do it anyway.
A full understanding of your cap table will ensure you are making a fully informed decision about how much capital to take for your next raise and the implications of the dilution (eg. do founders still own a majority of the business?) It will also help reinforce your grasp of the important levers of your business for prospective investors. You’ll get enough tough questions during your raise. Don’t let “How much dilution have you taken?” be one of them.
For more on cap table hygiene, check out this post by my friend Scott Hartley, GP at The Everywhere Fund, on The Marie Kondo of Cap Tables. And Carta has a helpful tool to help calculate dilution.