Your cap table tells the story of the ownership of your company. Make sure you have a clean story to tell to future investors. Manage your equity like a pro.
Presented by the Entrepreneurial Law Clinic student lawyers and featuring our distinguished expert panel:
Jeffrey Bodle, Morgan Lewis & Bockius
Justin Watkins, Drinker Biddle & Reath
3. Presenters:
Antonio Bonanni Tony Cassese Ernie Holtzheimer John Krajsa
Panelists:
Jeffrey Bodle, Morgan Lewis
JustinWatkins, Drinker Biddle
Clinic Director:
Steve Rosard
Slides available at slideshare.net/drexelelc/presentations
4. PresentationAgenda
Introduction
Start-Up
Initial CapitalizationTable
Hiring of Contractors & Employees
Updated CapitalizationTable
Convertible Note
Updated CapitalizationTable
Series A Financing
Updated CapitalizationTable
Overview of CapTable Resources
5. What is a CapTable?
A capitalization (cap) table lists who owns what in a startup. It
lists the company’s members and their units.
As your company grows, tracking ownership can become
more complicated.
6. Start of the Company
John,Tony and Paul founded a company at Start UpWeekend.
They name it “Dragon-Ware,” and incorporate as an LLC.
John has a business background and invests a $50,000 loan
from his father into the business. His units are not subject to
vesting.
Tony is a developer and works part-time for another software
company. His units are subject to vesting.
Paul is also a developer, works hard on the software for four
months, and then disappears.
7. Early Problems
Founders often feel they don’t have
time for paperwork or money to pay
for legal counsel.
However, the freewheeling lifestyle of
a startup can create due diligence
problems for the future.
Lost negotiating traction when dealing
with future investors.
8. Ghost Founders
Paul left after four months and
John andTony have continued on
without him.
Does that end all liability?
Oral contracts
Implied contracts
9. Undocumented Loans
How will you structure your
loans from family or friends?
Are they investing in the
company or are they lending
the money personally?
Equity or debt?
10. Closing the Loopholes: Key Documents
Founders’ Agreements
Decide voting, buyouts, terminations and deadlocks
Subscription Agreements
Vesting
IP Assignments
Operating Agreement
Authorized Classes and Numbers of Units.
12. Questions for our Experts:
What are some of the most easily avoidable mistakes that
founders make right off the bat, and how do they affect
investment later on?
Why should you start a cap table before your business gets
more complicated?
13. John andTony are looking to hire:
An Independent Contractor
An Employee
How can they pay them in equity?
Hiring
15. The “Non-Dilutible Problem”
Tony and John own 80%
New hires own 20% non-dilutible together
New Investor brings in $1,000,000 for 50% of the
company.
18. The Option Pool
40%
40%
20%
After Adding Option Pool
John Tony Option Pool
Option Pool
Units (shares) reserved for
future employees, advisors,
etc.
Option Plan
Rule 701 Exemption from
Securities Act
19. Unit Options
What is it?
Right to buy company units in the future at a
specified price.
(Holder must pay to exercise)
Example:
Option to purchase: 50000 units (5%)
Strike Price: $0.01 (Fair MarketValue)
Length: 10Years
20. Common Units
Tony and John give Independent Contractor 5% of common
units
NOTE: If given equity subject to vesting- make 83(b) election.
Pay tax now, instead of later
250
500
750
1000
Year 1 Year 2 Year 3 Year 4
UnitsVested
21. Vesting Schedule
50,000 Units over 4 years.
Leave after two years = 25,000 Units
1 year cliff?
Leave before one year = 0 Units
22. Profit Interests
Only for LLCs, not for Corporations
Common Units Tax Problem
5% of $1,000,000 = $50,000
Share in the company profits.
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
When Issued Post Issue
COMPANY VALUE
26. Questions for Experts
We discussed a few ways founders can issue equity in lieu of
money to new hires. What types of structures have you found
to be most effective?
Have you seen any effective ways in which employees have
been able to protect themselves from dilution?
27. Convertible Note
Raised 18 months into the business’ operations
Terms:
$100,000 investment
30% discount
$2,500,000 valuation cap
Converts upon a Qualified Financing of $750,000
29. Questions for our Experts:
1. Have you seen more entrepreneurs choosing to raise
convertible debt at early stages?Why or why not?
2. Is there a better way to structure the investment, for
instance as a Simple Agreement for Future Equity (SAFE)?
30. Series A Financing
Company needs to raise money for hiring more employees
Raising $1,000,000 with a $3,000,000 pre-money valuation
Convertible note will convert at 30% discount
VC wants the following:
Employee Option Pool increased pre-money
Due Diligence Issues:
One founder isn’t vesting
No IP AssignmentAgreement for independent contractor
No documentation of $50,000 loan
31. Series A Financing (Continued)
KeyTerms of Series A Financing
Fully diluted v. Non-diluted CapTable
Pre-money valuation
Liquidation Preference
Multiples & Participation
Board of Directors
Dividends
“Cumulative and accrued” v. “When and if declared”
Be sure to have counsel represent you when raising money!
32. When Raising Money:
Several Factors to Consider:
No definite amount – determine your true need for the investment
Amount of time before the investment is needed
How long you expect funding to last
Example: Get Satisfaction
Raised $10 million at a $50 million valuation
Sold to Sprinklr for an undisclosed amount
34. Questions for our Experts:
1. What are some of the most common surprises you’ve seen
amongst entrepreneurs while raising money?
1. What are some of the downfalls of raising money at too high
of a pre-money valuation?
35. Why Use a CapTable Service?
Consistency (Avoid Mistakes)
Can happen at any level
Tibco Software Inc. “The $100 Milllion Mistake”
Security and Functionality
What if the person with the CapTable leaves?
View v. Edit Capabilities
Compliance
Make your CapTable a tool
Tax Compliance/Reminders
38. Consistency (Avoid Mistakes)
Regardless of how many “cooks” get into
the CapTable, it will have the same look
and feel
Ex: Capshares
View v. Edit Capabilities
As the business grows, so does the Cap
Table
No problems with switching over when
the table has become more complex or
having the company outgrow its Cap
Table abilities
Ex: eShares
Monthly pricing that grows with your
needs
39. Security and Functionality
FromTerms toTable
There are A LOT of EconomicTerms in aTerm Sheet or
Employment Agreement
Dividends
Vesting
Conversion Discounts
Liquidation Preference
What do these terms really cost me in an exit?
Ex:Captable.io
User Friendly Exit Modeling
40. Compliance
Additional Services
Tax and Security Regulations Services
409A (Deferred Compensation)
83(b)
Compliance in Issuing Options
Rule 701
Stock Expense Reports
Document Hub
Keep a copy of any subscription agreements online with you Cap
Table
41. Panel Experts:
What are some latent issues that
you have found with your clients
that ended up costing them more
down the line as opposed to
catching and fixing them early
on?
42. Prepare forTomorrow,Today
Time = Money
Maintaining your own CapTable often takes hours and requires
significant effort as the company grows
See eShares: Demos
Early issues can create big problems later
Latent errors can cost $$$ in the long run
Tibco
$100 MillionCapTable Discrepancy
Felt by Shareholders (You)
43. Which Service is Best for My Company?
Factors:
How many shareholders?
How mature is your current CapTable?
When and how do you plan on taking investment?
What accounting/tax requirements do you need to meet?
How experienced are you with CapTables?
44. Who Should I Use?
Least Expensive (For Most)
Capshare: Free “Lite” service if under 25 Shareholders/Members
Continual Learning
eShare
Exit Modeling (More Mature Companies)
Captable.io
In General: Shop Around, Ask Questions
