In this article, we talk with Juan Conde from the Novus Concilium team to learn about the cap table, how it is managed, and why it is so important for a startup to understand how its cap table and share administration work.
Specifically, we answered the following questions:
- What is a cap table?
- What percentage of my startup should I give up in each round?
- How can you fix a heavily diluted cap table?
- Types of shares
- What is an option pool, and how does it work?
- What is vesting, and what is it for?
- What is a cliff?
What is a cap table?
Cap table is short for capitalization table. Essentially, it shows how a startup’s share capital is divided into shares. Information included in a cap table includes:
- Number of shares
- Share class
- Shareholders
- Price per share
The simplest way to represent a cap table is in an Excel file or spreadsheet.
What types of shares are there?
Generally speaking, in venture capital there are 2 classes of shares:
Common stock.
Common shares give their holders full corporate and economic rights. This is typically the type of shares founders receive.
Preferred stock.
Preferred shares come with certain economic or corporate rights that take precedence over those of common shares. They are also generally subject to limited voting rights. This is typically the type of shares investors receive.
What percentage of my startup should I give up in each round?
The maximum recommended percentage of a startup to give up in each round is
20%, meaning it is recommended that a startup dilute its ownership by no more than 20% in each round. There are exceptions where giving up 25% is feasible; however, to offer a clear figure, we’ll stick with 20%.
On the other hand, in a pre-seed or seed round, it may be more common to give up less than 15% or even 10%, since the amounts raised are smaller than in a Series A.
For more information, we recommend watching the video starting at minute 05:40.
What is an option pool?
An option pool is a set of shares reserved for talent working at a startup. Eligible employees will have the right to purchase a percentage of those shares according to certain criteria and agreements, with the aim of compensating for their salary expectations and helping retain them at the company.
What is vesting?
The vesting is an agreement that specifies the amount of time that must pass before a startup employee can exercise their right to acquire a percentage of shares. A “cliff” is also commonly applied at the start of the vesting period.
In addition, the standard expectation is a 1-year cliff, followed by another 3 years working at the startup before the employee’s 100% of vesting is released over a total period of 4 years.
What is a cliff?
During the vesting period, the cliff is the initial period when an employee cannot exercise their right to purchase shares, until they reach the 1-year milestone, which is usually 1 year. Once that milestone is reached, the employee is entitled to acquire a percentage of the total amount promised (25% in a 4-year example), as agreed. After that, the rights to purchase shares are released monthly rather than annually.