United States: Simple Cap Table Analysis

When making a venture capital or growth equity investment, perhaps the most critical priority is confirming that your pro-forma ownership percentage of the target company aligns with your investment expectations – in short, that you are getting what you paid for. While cap table analysis can seem confusing at first glance, you can in most instances quickly confirm the outcome lines up with your assumptions using a simple calculation:

1. Start with the implied valuation of the company as of immediately prior to the investment (the "PreMoney Valuation").
2. Add the total amount of the equity financing (your investment, together with the total amount of money expected to be raised from other investors) to the Pre-Money Valuation (this sum is the "Post-Money Valuation").
3. Divide the dollar amount of your investment by the Post-Money Valuation – this number (the "Reference Percentage") is the percentage of the total value of the Company that you should own. For example, a $1mm investment in a Company with a Post-Money Valuation of $10mm equates to a Reference Percentage of 10% ownership interest in the company.
4. Review the company's cap table and divide (i) the number of shares to be allocated to you, by (ii) the company's "fully diluted equity capitalization" (which should include the full amount of any option pool, even the unallocated portion) (this quotient is your "Cap Table Percentage").
5. Compare the Cap Table Percentage to the Reference Percentage. If there is any variance between these two values, it is likely that either your investment is absorbing hidden dilution, or the company has made an error in its preparation of its cap table (a not uncommon circumstance).

Example

Assumptions:

• Pre-money valuation of the target company is $40mm
• Amount raised in financing round is $10mm
• Dollar amount of your investment is $5mm (i.e., $5mm of the $10mm)
• You will receive 1,000 shares
• The Company's post-money "fully diluted equity capitalization" is 10,000 shares

Therefore, you would follow the below steps to find confirm that your understanding of your fully-diluted ownership lines up with the ownership percentage you will actually receive:

1. Post-Money Valuation = Pre-money valuation + amount raised in financing round

2. Reference Percentage = Dollar amount of your investment / post-money valuation

3. Cap Table Percentage = Shares allocated to you by the company / the company's post-money "Fully Diluted Equity Capitalization"

4. Cap Table Percentage = Reference Percentage

In this example, you have confirmed that the company's calculation lines up with the ownership percentage implied by your investment assumptions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.