Thursday, May 16, 2019
Capitalization Tables DemystifiedBy: Kevin Learned and Denise Dunlap, Boise Angel Alliance Terms like “warrants, waterfalls and preferences” can be confusing and intimidating when attempting to understand a capitalization table (aka cap table); it is no wonder we are often asked for a simple way to understand them! This article will give a brief overview of why cap tables are important and introduce a simple model to use early in the due diligence process. As fund administrators and instructors for the Angel Capital Association (ACA)’s educational programs, Loon Creek founders Kevin and Denise sometimes develop tools to help investors understand the concepts presented in the courses they teach. Many years ago Kevin developed a simple spreadsheet to model basic cap tables for use by our local angels as part of their regular due diligence process. He introduced this model during his presentation at a recent national webinar for the ACA discussing the basics of cap tables. You can download a copy of that cap table model as well as access the webinar archive from our Resources page. For those who would like a brief primer, a capitalization table is a document that lists all of the owners of equity and potential equity, the shares they own and the percentage ownership those shares represent. Typically, the cap table is organized by type of security and/or by investment round. We believe it is important for angel investors to understand cap tables. It is part of our regular diligence process to first construct our own summary cap table before we decide to invest. Here’s what a rudimentary cap table can help you answer:
We have also found this simple model to be a helpful tool when working with entrepreneurs who are new to the process – often cap tables are confusing to them as well! In our experience, many entrepreneurs rely on a third party such as an attorney to maintain the schedule for them and only understand it at a high level. Admittedly cap tables can become very complicated when they take into account convertible notes, warrants, preferences, waterfalls and other terms and instruments that may impact our return. But we argue that if the simple cap table doesn’t show you that it is possible for this investment to make stellar returns, then you need go no further with negotiations or due diligence. The ACA has a wonderful advanced course on cap tables that teaches the audience to deal with the myriad of possible return-reducing conditions. Information on this and other ACA courses is available from their website. Click on “Education” on the top ribbon. Meanwhile, we hope our simple cap table model will be helpful to you. |