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Don't Pay Too Much: Use Cap Tables to Ensure Deals Are Right For You

Angel investing is risky. This is a mantra my readers have heard me repeat time and again. I’m game for doing everything possible to mitigate risks and increase success. It’s also why, although I don’t have a PhD in finance, I’ve made it a priority to understand the fundamentals of capitalization tables, known as “cap tables.”

A pro-forma capitalization table is a spreadsheet that reflects the capitalization structure of a company today as well as immediately following a potential investment (i.e. on a “pro forma” basis).  It shows the percentage ownership of investors and founders, fully diluted, after a funding round, and differentiates preferred and common shareholders, among other things.  Cap tables are typically attached as an exhibit to a financing term sheet.  An investor can also use a pro forma cap table to help assess the effect on their ownership of dilution from future rounds.  Finally, a pro forma cap table can be used to estimate the likely allocation of returns if the company is sold and quantify potential returns based on estimated proceeds in various exit scenarios.


So how does a non-finance person start to understand cap tables? This week I got some lessons from two experts:  Kevin Learned, a Board member of the Angel Capital Association and Trevor J. Chaplick, an attorney and shareholder in the Private Equity/M&A and Corporate and Securities practices of Greenberg Traurig, LLP.

Kevin did a 20-minute introductory presentation to capital tables for investors and entrepreneurs to learn from.  He also provided a downloadable basic cap table model.  Trevor is leading an ACA webinar in September on The Basics of Cap Tables, which will build on Kevin’s introduction, getting into the real world twists and turns of angel deals, subsequent institutional financings and exit scenarios.  Trevor’s most important tip? “Don’t think of a cap table as just a financial document. Use it as a discipline to force a discussion and negotiation of the variables that will have a direct bearing on the success or failure of your investment. Use it as a key tool to quantify both how you get in and how you may exit an investment .”

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