Cap Table Model for Fundraising

TL;DR

When starting a business, founders often overlook one of the most critical components of running a successful startup: capital structure management. As your business grows and attracts investors, keeping track of ownership percentages and dilution becomes essential. This is where a Capital Table Model comes in handy. Investment rounds are key milestones for startups as they grow, allowing founders to raise capital and onboard investors. However, managing equity, pre- and post-money valuations, and instruments like convertible notes can quickly become complex. This is a walkthrough of my Capital Table Model template.

Founders' Round: Identifying Starting Capital and Structure

The "Founder Round" of the model serves as the foundation for tracking how ownership is distributed among founders and other key stakeholders, such as employees via an Employee Stock Ownership Plan (ESOP). It also defines the initial startup capital and how shares are allocated. Here’s a breakdown of the components included in this section and what they represent.

Starting Capital

This section helps founders identify the initial capital contribution of each founder or investor at the inception stage. The contributions are typically listed in USD (or other currencies) to clarify the monetary value of each stakeholder’s investment.

• Founder Contributions: The individual monetary contributions of each founder.
• Startup Capital: This is the total amount pooled together from all founders. It provides the company’s first working capital, allowing it to fund initial operations.

Tip: Equal contributions aren’t always required, but clarity and transparency about contributions from each founder, and equity ownership are critical to avoid conflicts later on. There is no right or wrong way, it all comes down to what is agreed.

Number of Issued Shares

The concept of shares is important for defining ownership. At this stage, the model outlines the total number of shares issued and their allocation.

Key metrics include:

• Number of Issued Shares to Be Paid Up: This is the total number of shares the company will issue at inception.
• ESOP as a Percent of Total Paid-Up Shares: A common practice in startups is to reserve a small percentage of shares for employees through an ESOP, although this could be worked out during the next funding round.

Why Is This Important?

The inception stage sets the tone for future financial planning. It gives founders a clear picture of:

1. Who owns what: Ensuring everyone understands their stake and responsibility.
2. Dilution planning: Avoid surprises when fundraising or expanding the ESOP.
3. Investor readiness: A clear capital structure builds trust with investors, showing you’ve thought through your startup’s ownership.

Investment Rounds

The Investment Rounds section of a Capital Table Model helps founders understand and manage the implications of each funding round on their ownership structure.

In this section, we’ll explore the Investment Rounds, as outlined in the image, and break down the key components of this model, including inception setup, convertible note (SAFE), and equity financing. This section builds on the Founders' Round we discussed previously.

Each column in this section represents a different stage in the company’s funding lifecycle. In this example, we are looking the first 3 investment round:

• Founders: This is the foundation set up in the earlier section, which includes initial capital, shares, and ESOP.
• Angel Round: A convertible note (or SAFE) round, where funds are raised with a promise to convert into equity at a later stage (Seed Round), often at a discounted valuation.
• Seed Round: A traditional equity financing round.

These columns allow you to see how valuations, new shares, ESOP, and ownership evolve with each round.

Investment

This section tracks the financial inputs and terms for each funding round.

• Date: The timing of each round. For example:
• Round Type: The type of funding instrument used:
  • Convertible Note: Used in the Angel Round, allowing funds to convert into equity later at a discount. Based on the terms, this can be set up to be a SAFE note.
  • Equity: Used in the Seed Round for direct equity investment.
• New Capital: The amount raised in each round:
• ESOP Prior to Next Round: This calculates the remaining shares and percentage allocated for the ESOP before the funding round, ensuring founders maintain sufficient ESOP allocation.

Tip: Convertible notes and SAFEs are flexible instruments for early-stage fundraising but require careful planning to avoid excessive dilution.

Valuation

The Valuation section helps founders understand how pre- and post-money valuations impact share prices and ownership distribution.

• Pre-Money Valuation: The company’s valuation before new capital is raised.
• Post-Money Valuation: The valuation after the new capital is added.
• Pre-Money Share Price: Calculated as the pre-money valuation divided by the total number of shares before the round.
• Newly Issued Shares: The number of shares issued during the round

This section is crucial for calculating the value of your company and determining how much equity you’re giving up in each round.

SAFE or Convertible Note

Convertible notes and SAFEs (Simple Agreements for Future Equity) are popular instruments for early-stage fundraising because they allow companies to raise capital without immediately setting a valuation. Instead, these notes convert into equity during a subsequent funding round, usually at a discounted price or based on a valuation cap.

In this model, the SAFE/Convertible Note Settings section outlines the key terms that determine how the note will convert into equity during the next funding round.

Key settings in this section include:

• The interest rate represents the annual percentage return on the amount invested via the convertible note.
• Why it’s excluded in a SAFE: Most SAFE agreements do not include an interest rate because they are designed to simplify the fundraising process. Unlike traditional convertible notes, SAFEs are not debt instruments and do not accrue interest.
• When interest is set: For convertible notes that include an interest rate, the accrued interest is added to the original principal investment. This adjusted total becomes the basis for calculating the number of shares issued upon conversion.
• The valuation cap is the maximum valuation at which the convertible note or SAFE will convert into equity, regardless of the actual pre-money valuation in the next funding round.
• Why it's important: A valuation cap protects early investors by ensuring they receive equity at a favorable price if the company’s valuation grows significantly before the next round. Without a cap, investors could end up converting their note at a very high valuation, resulting in fewer shares.
• Founder-friendly SAFEs: Many founder-friendly SAFEs omit a valuation cap, especially if a valuation discount is already offered. This approach reduces the risk of overly diluting founders' equity while still providing a benefit to early investors.
• Uncapped valuation in this model: In this model, the valuation cap is set at an unrealistic placeholder of $999,999,999, which effectively removes the cap. Alternatively, founders can set a valuation cap higher than the expected pre-money valuation to avoid triggering the cap.

Valuation Discount

• The valuation discount gives convertible note holders the right to purchase equity at a reduced price compared to other investors in the next funding round. This discount is designed to reward early investors for taking on higher risk.
• Setting discount at 15.00% means the note holders will convert their investment into equity at a 15% lower valuation than the price paid by new investors in the Seed Round or following equity round.
• How it works: The discount is applied to the pre-money valuation of the next funding round. For example:
  • If the Seed Round pre-money valuation is $750,000, the effective valuation for note holders will be $750,000 × (1 - 15%) = $637,500.
  • The number of shares allocated to the note holders is then calculated using this discounted valuation.

How It All Fits Together

This section highlights how funding decisions at each stage affect the company’s financial and ownership structure. Here’s an example of how the Angel and Seed rounds interact:

• In the Angel Round, the investor provides $30,000 SAFE Note with terms of converting into equity at a discount upon the next equity financing round. This doesn’t impact the pre-money valuation or share price immediately.
• In the Seed Round, the $30,000 converts into equity at a 15% discounted valuation. Combined with the $100,000 raised through equity financing, this determines the total number of new shares issued.

Understanding the dynamics of investment rounds is essential for founders to:

1. Minimize Dilution: Ensure you’re raising the right amount of capital without giving away too much equity.
2. Plan for Future Rounds: Leave room for ESOP and additional investors in later stages.
3. Attract Investors: A well-structured cap table demonstrates financial clarity and professionalism, which are key to building trust with investors.

Output Metrics

With the groundwork laid out in the earlier sections of the Capital Table Model, the final output provides a comprehensive summary of key metrics to help founders make informed decisions about fundraising, ownership, and dilution. By carefully modeling future rounds of investment, founders gain clarity on how their ownership evolves, ensuring they can plan effectively for the long-term success of their startup.

The final table produces all the details from prior sections into actionable insights. Here’s a breakdown of the components and why they matter. - Founders’ Ownership Summary: This section tracks how founders' ownership percentages change across each funding round. - Ownership Summary by Rounds: This section expands on the percentage ownership for all key stakeholders. It provides a clear picture of how each group’s stake evolves after every round of investment. - MOIC (Multiple on Invested Capital): The MOIC metric shows the return multiple for each stakeholder based on the company’s valuation and their initial investment. - Share Value: The Share Value section highlights how the monetary value of shares evolves across funding rounds.

Final Thoughts

The metrics presented in this final section help founders and stakeholders answer key questions:

1. How much ownership will I retain after each round?
   • Founders can evaluate whether they’re giving away too much equity too early or leaving enough room for future fundraising.
2. What is the impact of SAFE notes or convertible instruments?
   • Modeling SAFE conversions ensures there are no surprises during equity allocation in subsequent rounds.
3. How does my company’s valuation growth translate into returns for investors?
   • Understanding MOIC and share value helps founders showcase the potential returns to future investors and negotiate better terms.

The Capital Table Model is a vital tool for founders looking to raise capital strategically while preserving ownership and creating value for stakeholders. By modeling future fundraising rounds with tools like this, founders can:

• Avoid surprises during fundraising negotiations.
• Balance dilution with the need to raise sufficient capital for growth.
• Ensure fair and transparent equity distribution among founders, investors, and employees.