Notes

Cap Table Management Basics
A cap table is the part of a company's capital budget that records the ownership of various assets. This is a useful tool because it makes it possible for investors and other business professionals to track the value of a company. For example, during a funding round of venture capitalists, a potential partner can look at the cap table to determine how much money the private investor is willing to invest. Investors can also use the cap table to set limits on possible investments and to determine whether they should continue to fund the company based on the results of the cap table analysis. A cap table also makes it possible for a company to track and report the value of its key projects, as well as its operating cash flow and total equity.

There are a number of reasons why startup companies look for outside funding for their businesses. For one thing, venture capitalists typically want to work with startups that have a solid plan and have a plan to execute their plans. A good cap table management service can help you set the appropriate metrics for your capital raising efforts. Additionally, investors usually have an interest in startups that are profitable and provide solid guidance to the company as it grows and develops. Cap tables are designed to ensure that both the startup company and the private investor ( VC ) are profiting from the deal.

Managing a cap table starts with identifying which of your company's many projects is of strategic importance to you. We recommend working with a fund manager or investment management firm to do this. If you are new to the game, it may help to work with a mentor or two as they will be able to give you expert advice as you identify which projects are most promising and strategic to your business's future growth. The best way to manage these investments is through a combination of fund management and cap table management. We recommend working with a number of different specialists, each focused on a particular area of importance to your business.

Next, we recommend evaluating your early days strategy. We have found that managing early days investment is one of the most challenging and rewarding aspects of being an entrepreneur. We have had success, early on, with working with institutional investors, but as we got more involved in our local tech scene, many investors were reluctant to invest. While this was frustrating, it was also a situation in which we had plenty of experience and a strong track record of success. Unfortunately, some of these same investors would not hesitate to pass on investing in a startup that we were developing.

As we began to move into our second financing round, several prospective investors shared with us their negative experiences with their prior funding rounds. While we did not experience significant issues, many of these first time investors had an incredibly difficult time convincing their peers that we had the fundamentals to succeed. As we continued to develop and launch new products, many of these early investors indicated that they had already passed on investing in our company because they felt we did not have the necessary combination of products, services, and customer service to be a successful startup. This was a difficult lesson for all of us, but clearly we learned the value of having a solid capital structure in place from the very beginning.

In addition to having a strong capital structure, we had a series of highly successful investor negotiations with multiple accredited investors. In each of these transactions, we were able to significantly reduce the price per share by reducing the cap size and increasing the number of shares outstanding. Although this may not appear to be an obvious use of cap table management throughout the course of your business's operations, there is certainly a benefit to becoming adept at negotiating favorable investor financing. As we moved into our Series 7 funding, we experienced several significant investor negotiations, including a deal in which the seller of a large number of shares offered a significant discount to the price per share, in exchange for having the shares purchased directly from the business (a "seller carry" arrangement).

The potential use of cap table or equity capitalization table is not limited to investment banking, but extends beyond Wall Street. In our real estate investment experience, we were involved in multiple transactions that were subject to equity dilution or cap table management. One of these was a home buy-out transaction in which we had invested substantially in a low cap bank owned foreclosure property. Because the property had significant equity and a substantial amount of goodwill, we were able to obtain investor financing even when the price per share was capped at a low point.

All of us are familiar with the term "ongoing management". This refers to the ability of a company to effectively manage its own financial resources in an effort to preserve shareholder wealth. We believe that cap table management is an important means of managing ongoing management and cap tables across many types of businesses should be a part of a company's ongoing management strategy. By maintaining a large capitalization table and regularly assessing its use across all of the many aspects of business, you can enhance your ability to optimize your return on investment and also ensure that you retain the long-term interest of your shareholders.
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