Capitalization Tables for Startup Founders Part 3: Series A Funding
“Capitalization Tables for Startup Founders” is a three part series that will help new entrepreneurs better understand capitalization tables (“cap tables”). I edited a cap table template from S3 Ventures for this series, which can be downloaded here. Thanks, S3! You can download my specific Excel template (from the video and screenshots below) here — please click the download icon rather than requesting access to the Google Drive file.
Part 1: Pre-Investment | Part 2: Convertible Notes | Part 3: Series A
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In Part 2 of the series, our hypothetical startup raised $150,000 from two angel investors in the form of a convertible note. Now, it’s January 1, 2017, and our startup completed its Series A Funding from three new investors. The two notes will finally convert into Series A Preferred shares and the new investors will be issued Series A Preferred shares as well. In our typical numerical format, let’s see how it’s all done.
If you haven’t started already, I highly suggest you follow along on my Excel sheet, which I originally leveraged from S3 Ventures.
Image #1
[1] — The pre-money valuation (e.g., the value of the company prior to investment) is $4,000,000. This number is negotiated with the Series A investors and is very subjective.
[2] — As the startup grows, it needs to hire more employees, which will require the granting of common stock options. As such, the Series A investors wanted the company to increase the option pool by 150,000 prior to funding. Remember, this dilutes all equity holders in the company except the Series A investors because it occurs prior to Series A funding.
[3] — As we showed in Part 1 and Part 2, the company had a total of 1,000,000 fully diluted shares outstanding. Then, we expanded the option pool by 150,000 shares, which equals a total of 1,150,000 shares prior to Series A funding.
[4] — Now it’s time for the magic number — price per share — which determines how many shares each investor, including the angel investors, will receive as a result of the funding. $4,000,000 pre-money valuation divided by 1,150,000 shares prior to funding equals $3.48 per share.
Image #2
In Image #2, we will distinguish between Series A Value and Series A Cash. The Series A Value calculation determines how many shares priced at $3.48 per share each investor will receive and the startup’s post-money valuation. However, Series A Cash simply shows how much cash the startup received as a result of these investments. As discussed in Part 2, the two convertible notes will accrue interest and will receive a 10% discount; consequently, Series A Value will differ from Series A Cash.
[5] — Note that the $150,000 convertible note received in Part 2 is included in the Series A Cash calculation. At first it was a loan, but now it counts as cash received as a part of the Series A conversion.
[6] — Total cash received is $2,200,000, which is $23,481 less than the value created as a result of the financing as shown in the “Total Series A Value” row.
[7] — These convertible note values include accrued interest and a 10% discount (calculated in Part 2). Additionally, note that Angel Investor #1 invested $50,000 as a part of the Series A funding. The $50,000 is solely a straight equity investment and has nothing to do with convertible debt.
[8] — Three new investors comprise the Series A funding who invested a total of $2,000,000 in our startup.
[9] — As calculated above, the total value of the Series A investment, which includes the two convertible notes, is $2,223,481. Add that to the $4,000,000 pre-money valuation, and we arrive at a post-money valuation of $6,223,481.
Image #3
Image #3 above shows our detailed cap table by person/entity, including the changes at each stage of funding.
[10] — The 150,000 share expansion of the option pool is included in the Pre-Investment Cap Table, not the Series A Cap Table.
[11] — As shown in Image #2, the total value of of Angel Investor #1’s investment is $165,654. Divide that by the $3.48 price per share, and this investor is issued 47,625 shares. Remember, you cannot issue fractions of shares so use Excel’s rounddown() formula; also, the $3.48 share price is not rounded, so the math doesn’t exactly work out if you’re doing the calculation outside of Excel.
[12] — The total number of fully diluted shares outstanding, including common stock and Series A preferred shares, is 1,789,250.
Image #4
As always, an organized Cap Table Summary never hurt anyone, such as the one in Image #4 above.
Wait…
We’re not done just yet. Remember how in Part 2 we left two cells blank because we didn’t have the necessary Series A information? Let’s fill in the highlights below now.
Table #5
With a rounded share price of $3.48, Angel Investor #1 was issued 33,251 shares from the note conversion, and Angel Investor #2 was issued 16,625 from the conversion.
That’s it! Don’t forget to follow along in the Excel spreadsheet to help your understanding.
If you spot any mistakes or would like me to elaborate on a particular topic, feel free to let me know!
