Silicon Valley Legal Bible（4）How to Read Your Own Cap Table

The Silicon Valley Legal Bible with Forty-Two Chapters, a legal encyclopedia customized for founders. I'm U.S. lawyer Xiaoxiao Liu.

"What percentage of the company do I now own?"

"How come my share is 10% one minute and 8% the next."

"What percentage of our company's options have been exercised?"

All of these questions can be seen in the company's Cap Table, which has been with the founders since day one and has been updated throughout the company's life cycle. Some of the entrepreneurs I've talked to, even those in Series B and C, don't fully understand how to use the Cap Table. So in this issue, let's learn how to use Cap Table.

I.Cap Table is not a government registration document.

Before we start, I must dispel this serious misunderstanding, many people think that Cap Table will be registered to some government department after each round of financing. No!

Those of you who watch my videos regularly should have heard this a million times already, but I'll emphasize it again:

"There is no equity registration in the United States."

In the U.S., all equity information is private within the company and simply needs to be filed at your company, there is no need to report it to any department, nor is there any such department in the U.S. that receives this. Some people then start to raise hell

The founder of a startup says, "We keep track on our company Carta, which founder, which employee, which investor has how many shares?"

Employee at big tech company says, "I have RSUs for our company, they're all on what Fidelity, Merrill Lynch, Charles Schwab, Robinhood ......"

Stop stop stop! That's a lot of knowledge to learn.

Carta itself is a tech startup, its business is startup equity statistics, that is to say, it just puts an Excel with a more user visualization way to present to you, its essence is no different from an Excel table. Or you can understand that Excel is a form developed by Microsoft that can be widely used in various statistical application scenarios, while Carta is a form developed by Carta and their company that is specifically applicable to the application scenarios of startups' equity statistics.

As for the back of those Fidelity, Merrill Lynch, Charles Schwab, Robinhood and so on, these are the United States brokerage firms, with our Guotai Junan, Shenwan Hongyuan, Guangfa Securities, Huatai Securities is no different, not that they are official institutions.

Well, here we come back to look at our theme, how to read Cap Table (capital structure form)

II.Pre-Money and Post-Money Valuation

Pre-Money (pre-financing valuation), New Money (new money), Post-Money (post-financing valuation) these concepts should be often heard, right?

However, we should note that although these three words are all what what money, but you will find that Pre-Money (pre-financing valuation), Post-Money (post-financing valuation) is with a small short line, New Money (new money) is not with a small short line. Why?

Pre-Money and Post-Money are abbreviations, their full names are Pre-Money Valuation and Post-Money Valuation, while New Money is not an abbreviation of a certain word. And another difference is that New Money is real money coming in, while Pre-Money Valuation and Post-Money Valuation are not.

We can see that the founders only put $1,000 in the company when they came in, and the investors only put in $2,000,000 in the seed round, so not counting the company's expenditures and revenues, the total investment in the company is actually $2,001,000, which is many times worse than $10,000,000. As you can see from my eighth lecture on valuation in Corporate America, valuation is a very fictitious number, especially for tech startups, where the valuation is much higher than the book value of the company.

In particular, as you can see from the Pre-Money figure, the two founders only put $1,000 into the company with no new investment in between, but why did the Pre-Money rise to $8,000,000 in the seed round? It is because with the entry of seed round investors, the previous founder's research and efforts have been visualized and fixed in figures, and it is not because the founder put new money in that the company's Pre-Money (pre-financing valuation) became $8,000,000.

III. Shareholders at all levels

In order to make this chart look so cumbersome, we only list Series Seed Preferred Stock and Series A Preferred Stock, if there are Series B Preferred Stock, Series C Preferred Stock, Series C Preferred Stock, Series C Preferred Stock, Series C Preferred Stock, Series C Preferred Stock, Series C Preferred Stock, Series C Preferred Stock, Series C Preferred Stock, Series C Preferred Stock, Series C Preferred Stock, Series C Preferred Stock. If there are Series B Preferred Stock (Series C Preferred Stock) and Series C Preferred Stock (Series C Preferred Stock), then the same applies.

Here is also the same first batch to be a misunderstanding, many people think that the earlier the investor comes in the stronger the power, and some people even think that the founder's rights are stronger than the investor's rights, these are extremely wrong. If we compare entrepreneurship to a giant ship, the Titanic.

1.Common Stockholder

Then the Founder is the captain of the ship, and the Co-Founder is the first mate of the ship, and they are all the pilots of the whole ship. They are the first to arrive on the ship, and then they have to keep an eye on the ship's direction of travel, manage the ship's employees to ensure that they are working steadily, and take care of the passengers on each cabin level. If the ship makes it to the other side and lands in NASDAQ port, everyone gets off the ship happy and the Founder Captain and Co-Founder First Mate are honored and become startup stars.

But if the ship sinks (i.e., the company goes out of business) or if the ship gets picked up by a bigger ship (i.e., a merger or acquisition), the class of the people on the ship is especially important. Don't be surprised if I compare a Dissolution to an Acquisition because they are exactly the same in terms of the modeling of the exit of different classes of investors, except that in the case of a Dissolution only a very small number of people tend to get a share of the money or nobody gets a share of the money while in the case of an Acquisition only a very small number of people tend to get a share of the money or nobody gets a share of the money. Acquisition (Acquisition) is the majority of people can share the money just how much difference.

2. Preferred Stockholders

Series Seed Preferred Stockholder (seed round preferred stockholder), Series A Preferred Stockholder (A round preferred stockholder), Series B Preferred Stockholder (B round preferred stockholder), Series C Preferred Stockholder, Series B Preferred Stockholder, and Series C Preferred Stockholder) boarded the ship one after another. In the event of a shipwreck, Series C Preferred Stockholders on the evening boat are first class passengers and are given priority to board the lifeboats. Next are the Series B Preferred Stockholders, Series A Preferred Stockholders, Series Seed Preferred Stockholders, and the ones who paid the most. Founder (Founder) Captain and Co-Founder (Co-Founder) First Mate commanded all the people to leave, but he could only end up with the sinking ship together with the death.

3.ESOP

In fact, in addition to the Founder (Founder) captain and Co-Founder (Co-Founder) first mate, there are a number of more miserable people, that is, a variety of employees on board, including burning coal in the cabin of the workers, as well as various levels of guest rooms to clean up, run the hall to brush the dishes of the waiter. These people are the owners of the Stock Option under the ESOP (Employee Stock Incentive Plan) in the startup company. Founder captains and Co-Founders are at least Common Stockholders, while Stock Option owners have to wait for a 4-year Vesting Schedule, and then pay a sum of money to exercise their stock options before they can become like the Founder captains and Co-Founders. Founder (Founder) captain and Co-Founder (Co-Founder) first mate, if not before maturity it, the ship sank, sea water into the employees are directly dead, even thinking time is not.

"What? What kind of logic is this?"

Calm down! The first time you hear this, you will definitely feel that it is very upside down. Venture capital is a game of capital, not a game of labor, not who works more, but who pays more, who has the final say. You chose the path of entrepreneurship, you have to follow this set of rules of the game, rather than naively thought that the capital will pity the poor people.

4. Total number of shares

Further down the list are a few concepts of the total number of shares, which we have mentioned in the previous issues;

a.Authorized Shares (Authorized Shares), this is the total number of tickets, that is, how many people your boat can carry, but not necessarily your boat can sell all the tickets.

b. Total Outstanding, this is the actual number of tickets sold.

c. Fully Diluted Shares (Fully Diluted Shares), just now not that Stock Option (Option) those people on the ship are the ship's employees, are in the boiler room to burn coal, inside the stateroom to clean, inside the kitchen dishwasher, they do not even have a ticket on the ship, there is no official seat on the ship, and does not occupy the shares of the start-up company to stay up for four years before the opportunity to spend a sum of money to buy a ticket. So the Fully Diluted Shares assumes the ideal situation when all the Stock Options have matured, i.e. when all the reserved tickets have been sold. At the same time, you will notice that there are two percentages on the Cap Table, one is the Outstanding Percentage and the other is the Fully Diluted Percentage, which corresponds to the calculation of the total number of tickets sold as the denominator and the calculation of the actual number of tickets sold and reserved shares as the denominator. The other is Fully Diluted Percentage, which corresponds to the calculation based on the total number of tickets sold as the denominator and the calculation based on the actual number of tickets sold and the number of tickets reserved, respectively.

After introducing these concepts and calculations, I believe you will be able to read your cap table.

The Silicon Valley Legal Bible with Forty-Two Chapters, a legal encyclopedia customized for founders. I am Liu Xiaoxiao, a U.S. lawyer, and we will see you in the next installment.