The ABC reality TV show “Shark Tank” is incredible. Each week, contestants are offered millions of dollars for a piece of their company. They have about 30 seconds to say yes or no. It looks simple, doesn’t it?
Behind the scenes, it is anything but simple — and the business owners are the most likely to be the least prepared. I suppose that’s why this is called the Shark Tank. A lot of these business owners get eaten alive and end up selling their company for far less than it is worth.
Imagine you are in front of the Sharks on ABC’s “Shark Tank” show. They ask you point blank, “What’s your company worth today?” Do you really know the answer? Would you know what THEY think its worth by how much they offered you? You should… and you can, if you have a cap table.
Put yourself in Chris’ shoes. Chris started a cool new dot-com business. Then Chris invited two friends to join in: Tracey and Pat. They contributed a bit of money and he gave them a bit of stock. So far, the story looks like this:
- Chris started the company and still owns 20 shares
- Pat paid $25 each for 10 shares in 2010
- Tracey paid $5 each for 10 shares in 2013
Now one of the Sharks wants to buy 20% of the company. Great! There’s just a few questions: How many shares should we give him? How much should he invest? If he pays $10 per share, what’s the company worth? And how much of the company does Chris (the founder) still own?
Today’s angel investors ask these questions — and many that are much harder — and expect exact answers from you.
Here’s 8 things that Angel Investors (sharks!) expect YOU to know about your business and the offer you are making:
- Who has already invested and how much?
- What is the current “pre-money” and “post-money” valuation today?
- How many shares will my money buy me, and what percentage of ownership is that?
- If I take preferred shares, what percentage control of the voting stock will I have?
- How will current investors be “diluted” if I invest today?
- Do you have non-vested shares set aside for employees? What percent?
- How will I be diluted if we take on future rounds?
- What percent of the company will the founder own when all is said and done?
These are the kinds of key questions that only a capitalization table can answer. You need to know the answers, or your investors will simply say “I’m Out!”
Fortunately, a good Capitalization Table, or “Cap Table” can make this simple.
Look. You have a business. You have investors. Your financial future, your job, and your company are all on the line. You need a cap table. No investor is going to give you real money without one, and no business owner should ever take anyone’s money without understanding how it impacts everyone else’s current ownership.
How to Make a Cap Table Yourself
To make your own cap table, start simple. You can quickly calculate your stock value, ownership, and more in 6 simple steps:
- Start a spreadsheet with 5 column headings: Name, Shares, Investment, Ownership, and Value
- Now fill out the first column. Start by listing all the founder’s names. Leave a few blanks and then list all the investors. If the investors came in waves or groups, keep them grouped together. Each of those “waves” should be called a “Round of Investment”. The last (most recent) investor should be at the bottom of the list. If the same person invested more than once, include each purchase as a separate line.
- After each person’s name, put the total number of shares each person bought and the amount (in dollars) invested.
- At the bottom of the columns, total up the number of shares and dollars.
- Under the “Ownership” heading, we’ll calculate the percentage of the company controlled by each person today. To do this, you’ll create a simple calculation: the number of shares held by the individual, divided by the total number of shares held by everyone on the list. (X% = my shares / everyone’s shares)
- Finally, go to the “Value” column. This is trickier. Value changes each time someone invests, so look at the last or most recent investor. Calculate how much that one investor paid per share (price per share = dollars invested / shares purchased). Multiply the latest per share value times the shares held for each person on the list, and enter the result in the Value column.
That’s it! You’ve just created a basic cap table that describes your company’s current ownership structure. From this you can answer the basic questions “Who owns the business?” and “How much is it worth today?”
Cap tables are spreadsheets, so they can become much more complex. You can build a bigger model, like the one in the illustration, to project the changes in ownership as new investors come in. And if different investors get different voting rights, then you could create a column to include that calculation as well.
The basic capitalization table, however, is simple enough that every entrepreneur should take a moment to make one. Even if you’re not headed for a reality TV show, you never know when you’ll run into a shark! (Ready to buy a cap table that’s ready to go?)
Your Virtual CFO, David Worrell