A cap table is the list of owners (equity holders) and how their ownership percentage is distributed. In high-growth startups, proper distribution of equity is key for keeping founders and investors aligned over time.
Here are some points to consider:
- Accelerator programs often take equity in startups
- Startups typically share 10%-20% of equity in each financing round
- Founding teams in Latin America often seek to reach a Series A round with at least 50% of the company
Below is a graph of how a cap table can change over time.
Cap tables are re-organized at financing rounds so these are the moments to make sure you are set up for optimization.
Three key moments to review your cap table:
1. Founding: This is the most important part of the cap table and founders are benefited from having tough conversations up front. It often seems fair to divide ownership equally between three or four people, but it may not be optimal for the startup. The more founders a startup has, the less equity each individual will have and equal amounts spread across many people can make decision-making slower. I believe one or two founders should have significant share of the equity of a startup.
Founder vesting is a tool that can help align and incentivize founders as well as avoid “dead equity” left by members of the team who decide to leave, but retain equity stakes. Many future investors will require this term.
2. Angel, Acceleration, Seed Rounds: According to PECAP the median seed round in Peru is for 15% of the startup. Often, this 15% is split among more than one accelerator program or angel investor, leaving a cap table atomized without one investor or investor group having a significant share of the startup. This can make it hard for investors to dedicate time to add value and improve corporate governance. Founders want pick accelerator programs and investors that can add the most value by helping the startup achieve operating milestones and raise the Series A round.
3. Series A: Preparing for Series A can put a startup in a position to succeed long term. Series A investors will be keen to make sure that a founding team has enough incentives following the round – a good goal is 50% of the company going into the round. Investors should be aware that Series A investors may require a 10% Employee Stock Option Pool (ESOP) and ask that it is included in the pre-money valuation.
- Ragi Burhum of AmigoCloud recommends that founders should up an employee pool much earlier that prior to a Series A round
- Facundo Turconi of Solven, pointed out to me that for single founder startup it may make sense to consider a larger ESOP, of perhaps 15%.
Takeaway and Cap Table Example:
Founders and investors should seek to maintain a cap table that leaves enough incentives for founders and flexibility to add the right investors at the right time. You can find a template example for a cap table in Excel here.