Cap tables and venture capital go hand-in-hand. Without them, determining ownership, control, and exit returns would be nearly impossible. That’s because a capitalization table is a table that takes all of the shareholders in your business and lays out who owns what, how much each one owns, and what value is assigned to the stock they do own.
As a shareholder in your own business, cap tables are just as important for you as your investors. For a full run-down of how they work and all of the formulas needed to put them together and maintain them, read our full guide to understanding and reading cap tables. However, there are two major ideas to keep in mind when thinking about cap tables.
How Cap Tables Define Control and Ownership
First, they fundamentally define control. When you accept capital from investors, you give up both equity and control. For the purposes of this blog, let’s imagine a scenario where fairly standard terms were established.
In this case, the majority shareholders approve new funding and vote to elect new board members. This is critical since the Board of Directors is a startup CEO’s boss. The directors can remove or direct the CEO as they see fit. Additionally, to sell a company, there must a two-thirds majority of shareholders who vote “yes” to the sale.
Second, cap tables track ownership. Ownership becomes increasingly important as you raise more capital because you will give up more shares, affecting control and your exit return potential. To accurately assess the costs of taking on capital, you have to understand your ownership, your investors’ ownership, and how both would be treated in an exit scenario.
Clearly, control and ownership are both critical to exits. Namely, they impact both how exits are achieved and the returns reaped. Understanding how to calculate your exit returns will help you grasp the concepts of control and ownership, as well as prepare you to model out exit scenarios.
Calculating Exit Returns
In this basic example, we use numbers we previously established in our valuation guide. We will assume that the investors and founders 10M shares. The founders have 8M shares, and the investors have 2M shares. Let’s assume there’s no liquidation preference, just for the purposes of this exercise. The company has received a $20M acquisition offer.
This is how all parties involved would calculate exit returns. They would take values described above, which would be captured and maintained in the cap table, and first calculate price-per-share.
The formula is:
Once they determined price-per-share, they could then plug the number into the formula for exit value.
2M (Number of Shares for Investors) x $2 (Price-Per-Share) = $4M (Exit Value for Investors)
Without including some of the terms that may complicate calculations, the various shareholders quickly and easily determined their exit values. From there, they could consider whether to take the offer or wait for another potential exit.