https://eqvista.com/cap-table/pre-investment-cap-table/
You will need an up-to-date and well organized cap table to start keeping track of the share ownership in the company.
Now that you have launched your startup and are ready to start your business, have you thought of taking on new investments? If so, is your cap table up to date? You will need an up-to-date and well organized cap table to start keeping track of the share ownership in the company. It can be created using an application like Eqvista or you can use a startup cap table template and create one in Excel(although it is not advised to use an excel sheet for more complex share ownership).
With the help of a cap table, you will be able to see the details of all the equity ownership, percentage of ownership, and the value of equity in the company for each round of investment. In fact, even if you have no investors at the moment, it is important to have a cap table ready so when you reach out to potential investors, they can see the current ownership structure in the company.
But before we can talk about outside investments in the company, let’s cover what a pre-investment cap table is, and what one looks like.
A pre-investment cap table is a simple list of all the shareholders and how many shares they own in the company before any outside investment has been made. These shareholders are often the founders of the company.
When a startup is established, the founders of the company are issued common stock which eventually reflects how much of the company they own. The ownership of the shareholders are usually displayed as a percentage of the company.
Wondering how to decide on the ownership percentage? Well, the percentage is based on the number of shares that each founder gets. And the number of shares depends on the deal with each founder, normally based on their contributions to the company. These contributions can be in terms of commitment, responsibility, amount of time they invest, expertise, cash investment, and risk.
As soon as this is decided, the shares are distributed to the founders, and that is when the pre-investment cap table comes into play. It is called the pre-investment cap table because the company hasn’t had any outside investment yet.
The number of total authorized shares also must be considered, as these will be taken and issued later once more shareholders are added to the company. The next section will explain the difference between authorized and issued shares.
Note: The cash contributions by the founders is not usually considered as an investment as they are the ones who own the company and run it. And this is also why it is called the pre-investment cap table.
When a company is registered and incorporated with the government, it is assigned a specific number of shares, which is called the authorized shares. The number of authorized shares can be seen on the articles of incorporation of the company.
Now, once the company has the articles of incorporation in hand, the authorized shares can be issued to the founders or kept to be issued later on. After these shares are issued to the respective shareholders, they become “issued shares” in the company, and represent the ownership of each shareholder. And the shares that are left with the company as authorized shares are called the “unissued shares”.
To put in simple words, the authorized shares is the maximum number of shares that the company can issue. And the issued shares are the one that have already been given to someone in exchange for a service or investment.
Then how is the ownership of the person determined? Well, here is how you can find out the ownership percentage:
Ownership % = Issued shares held by a shareholder / Total issued shares
To explain this with an example, let us say that a shareholder Bill has about 15,000 shares and the total number of shares that are issued in the company are 50,000, then the ownership percentage of Bill is: