This is the 4th part of the Pro Cap Table training course. In this series we go through the starting cap table, the basics you need to know, then work sheet by sheet so you know how to make a seriously kick ass cap table.
There are 14 parts:
- What is a cap table and other important questions
- Cap table dilution step by step example
- Cap table dilution math
- Starting the cap table (The drop down menus we need)
- Shareholders sheet
- Deal calculations
- The cap table sheet
- The assumptions sheet
- Individual shareholder returns sheet
- Returns waterfall calculation
- The ESOP sheet
- The Common sheet
- The convertible notes and warrants sheet
- The preference shares sheets (From Series A to I)
You can join the course and get these sent straight to your mail box here:
Let’s start with the starting cap table sheet in the Pro Cap Table. There is technically nothing you need to actually change, you just need to understand.
So I’m going to teach you what the story is.
Here is the sheet:
This is going to be a bit of a mind screw. There are actually three ways to calculate the conversion of convertible notes. Everyone thinks convertibles are meant to be simple, but they are the opposite.
I’ve written a big blog and a short blog on the topic here. Yes, it is complicated but you need to get your head around it if you are to do convertible notes.
- Simple version: https://www.alexanderjarvis.com/2017/07/06/convert…
- Detailed version: https://www.alexanderjarvis.com/2017/05/14/key-con…
In the model, you only need to pick the method of conversion from a drop down menu and the calculations are done for you. Isn’t it cool the model makes it that simple? Yes, but that makes it dangerous as you actually need to understand what this means so that you can negotiate your term sheet with convertible note holders.
Pro rata means maintaining your ownership as an investor. This matters a lot. I’ll let Fred Wilson from USV explain:
“The “pro-rata right” is the right to continue to participate in future rounds so that you can maintain your ownership. Let’s make it concrete with an example. You invest $50k in a seed round at a $5mm cap and own 1% of the company. The next round is a $3mm round at $9mm pre, $12mm post. If you don’t participate, you will be diluted 25% and will then own 0.75% of the company. On the other hand, if you buy 1% of the round, a $30k investment, you will continue to own 1% of the company. Your “pro-rata right” in this situation is a $30k allocation in the next round.”
In the Pro cap table template, I made it so you can automatically calculate the pro rata. This makes it simple to do a few things:
- Calculate what investors’ pro rata actually is
- Plan for pro rata without a lot of calculations when you want to run some scenarios
There are two options in the model:
- Manual: You manually will input if there is any pro rata and what the $ investment amount will be
- Pro rata: The model automagically calculates the pro rata for investors. Let’s say they own 20% and would be diluted 20%. The pro rata would be to increase their stake 4% from 16% to 20% to maintain their ownership
There are a couple of types of shares (read options until they convert into shares) that staff can own. The three main ones (depending on your country, this is for the USA) are:
- RSU: Restricted Stock Units
- ISO: Incentive Stock Options
- NSO: Non-Qualified Stock Options
If you need to know about these, this blog is decent: https://www.theventurealley.com/2014/07/equity-com…
TBH, you should talk to a lawyer once you start down this road.
For the purposes of this model, to be generic for everyone, bucket things up into RSUs and Options (ISO and NSO).
RSUs are a bit weird. Accounting for these are funky. First you need to issue RSUs out of your ESOP. Then you adjust them out of the ESOP to the Common schedule and mark them as RSUs. The RSUs are basically vesting shares instead of vesting options in a sense. If you look at the filled in version of the Pro cap table you can see how the double entry is done and the commentary.
The ‘options’ on the other hand are a lot more simple in comparison. You just input them in the ESOP sheet. There is a bunch of complicated math done to size your ESOP pool and what is left after you issue options out of the ESOP pool. Since investors will ask you to increase your option pool between rounds, you will need to know how much you have reserved, how much you have granted and what is left. The model does the math for you (Yes, it took me forever to figure out!).
Once you grant shares or options, unless you are a silly billy, you will always have a vesting schedule.
The main things you need to know are:
- Cliff: You don’t get anything until you have reached the cliff, or the shares go off the cliff. This is typically a year
- Vesting term: This is the total period before you get 100% of the shares. This is normally 4 years
- Vesting period: You get a fraction of your shares every period, which is either monthly or quarterly. Monthly is better, daily is not normal but you would do. Basically if you have monthly vesting and you leave one day before the end of the month, you don’t get that month
There are three options for you to pick from. I have made 3 templates which cover 99% of what you might want to do. You pick the option you want from a drop down menu and it’s done.
This means you get all your shares at an exit. It’s a big FU to the vesting schedule we just talked about. Everyone other than the person that has this clause hates it.
If you get acquired and you have only vested 50% of your shares, acceleration means you now get 100%…. if you meet the single or double trigger clause.
The model gives you a lot of acceleration flexibility. For these purposes, you just pick if there is acceleration or not.
Issuance of common shares
I mentioned that how you manage share issuance and changes is the really fiddly bit. This does not affect the conversion of any shares, it’s a note for you to track things when they happen.
To mix things up, treat each line in the ledgers as a series of events, not as one line which says this is what they own. Every time you change something, you add a line and then the totals add and deduct to get to the totals. I’m explaining this terribly, so let me explain the options:
- Original issuance: you give shares/options to people, you probably thought that was all you did
- Restricted stock from ESOP: Mentioned above. When you issue RSU from the ESOP, you want to put it in the common sheet. This is the note you make
- Share transfer: There are a few reasons for this, the most obvious is taking shares from one person and moving it to another person
- Balance after repurchase: This can be from a transfer of shares from one investor to another, repurchasing shares from a terminated founder who had RSUs etc. You make this note when you need to do non-normal accounting (as you fired someone etc). You’re moving shares from one ledger to another or one person to another
- Options exercise: You grant options to staff, they look forward to exercising them into shares so that they own part of the company for real real! You note this when it happens, so shares go from the ESOP to the Common ledger. The same thing applies when convertible notes convert into the class of underlying class of stock.
This all probably sounds like a lot, and yes it is! This isn’t the baby cap table, it’s the PRO cap table. You can keep the model simple and not do a lot of this crazy stuff then hire a lawyer to do everything for you, but if you want to be totally on top of things, this is the sheet for you. There’s nothing else like it.
I’m proud of you for getting through this. I taught myself, ha!
There we go. Let’s get moving.
Click here to continueShareholders sheet
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