4 Factors Investor looks in your Cap Table | Jordensky

One of the most important things a CEO does is allocate capital through the use of a Capitalization Table, or Cap Table, which informs investors about who owns the company and what the founding team believes about financing, ownership, and exit strategies.

The Cap Table also shows how many people own a percentage of the company, how much stock has been issued, and how much is currently outstanding. It also displays the outstanding debt, whether traditional or convertible. Most importantly, investors look for four specific things in your Capitalization Table:

1. Breaks

Most investors consider cap tables with so many investors to be a red flag. A large number of investors can be distracting, which increases risk for a new investor. Investors prefer to own a large portion of a company. Negotiating future ownership stakes with a large number of small owners is thus risky for investors.

Groups of investors should be combined into larger cap table entries with defined and contractual points of contact. You can also manage the investors or cap table using a platform like Trica or Qapita

2. Loners

The Cap Table shows how much capital was contributed by investors and who owns what percentages. If you outsourced any work in exchange for equity, it will appear on the Cap Table as well. Investors prefer to see a well-rounded team with long-term incentives to stay with the company. The greater the risk, the less equity the team has or the more unevenly distributed ownership is.

It will take a decade or two for your innovation to reach maturity. Maintain as much equity as possible for team members and investors who will be involved for the duration of the project. Employee option pools ranging from 10% to 15% are common.

3. Impossibles

Missing an obvious assumption or fact at some point is inevitable. You don't, however, want to miss anything that makes your Cap Table or exit scenario seem impossible for investors. There are three simple things you can do to ensure your Cap table doesn't include an impossible scenario.

• Examine who owns what percentage of the company and how much money each investor expects to make. This is typically a 10-30x multiple of the initial investment.
• Consider how much revenue growth the team can generate based on the amount of capital invested. Is a $10 million investment sufficient to get your company to $500 million in annual revenue?
• Calculate the value of an acquisition at 6-8x the revenue calculated in step 2. Divide the revenue among all owners and deduct the amount each investor desired in step 1.

If you end up with negative numbers, your business model cannot support that much investment. Investors do not want negative returns to be the only option.

4. Favorites

We all have favourites, but the Cap Table isn't the place to indulge in such behaviour. I understand you want to give something special to each investor, but don't do it with the Cap Table. When terms are standardised, calculating who gets what during an exit is simple. When each investor has their own set of terms, the calculations become overly complex, introducing risk.

Failure to include a single investor's 2x liquidation preference could be the difference between the life and death of an investor's fund.

Optimize for terms that will benefit the entire company. Maintain as much alignment among investors as possible. If an investor provides unique value, repay them through deal flow or a role on the company's advisory or board.

Managing your cap table and equity compensation necessitates research, planning, and consideration. As a result, it is an excellent location for seeking advice from investors, lawyers, and other founders. A clean Cap Table and a solid equity compensation plan can be worth more than a million dollars.

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