A capitalization table is an indispensable tool when raising capital, operating, and controlling a business. Do not simply delegate its preparation to finance staff or investment lawyers (not yet common in Vietnam). Understanding and building this table is your responsibility as an entrepreneur.
This table shows the company’s owners and their ownership stakes before and after an investment round. It also helps you monitor the current situation to decide on subsequent fundraising rounds and arrange investors’ ownership stakes, thereby managing your investment strategy across multiple rounds.
A business will have various funding rounds. An entrepreneur may move from the “idea” stage (having only an idea or concept of what to do) to the “prototype” stage (having a sample product). But when you need more money to enter the “commercialize” stage (officially mass-producing or conducting major marketing to distribute products and attract users to a service/software/apps), you raise money for the first time. This round is usually called “Seed fund” (seed funding—individual investors tend to participate more than investment funds at this stage; even venture capital funds rarely join this early, except in emerging, very “hot” markets where a fund has just received abundant capital). When the business uses up the money from the initial stage, it moves as planned into its 2nd funding round, usually called “Serie A.” The next round is called “Serie B,” then “Serie C,” “Serie D”… and so on through the alphabet. The author has never seen a company reach a Serie Z funding round; the reason for that is perhaps best left for you to answer.
After each funding round, your company's capitalization changes. Why? Because your business situation may have changed. Perhaps you have just been through a crisis, gained more Users/Customers, grown sales tremendously, begun earning profits, developed new technologies, or increased brand recognition, etc. When a new investor enters, this “dilutes” existing investors' holdings and also changes the capitalization table because more cash is “injected” into your business. Your business's value has therefore changed with the investor's added money, so we distinguish “Pre-investment Business Value” from “Post-investment Business Value.”
All these assets—ideas, the initial product, the management team, user/customer numbers, revenue, profit, technology, brand, database and so on—are brought by the company's founding team. They therefore deserve to convert their efforts into ownership of a substantial portion of the company's shares. Those shares are called founder-held shares.
To recruit and retain more talented people in the future, you want to set aside a reserve fund for employee share awards. This fund must be considered carefully because it will dilute the equity value of both founders and investors. It is called an employee stock option pool.
Suppose:
-Your business is valued at $1.000.000 before investment (if requested, I will discuss business valuation in another article).
-You agree with the investor that the employee option pool will represent 20% of the business's post-investment value.
-New investors will invest $500.000 in cash in your business.
-The founding team holds 1.000.000 shares before the investors contribute capital.
We have the following calculation steps:
1.Business value after investment = $1.000.000 (pre-investment value) + $500.000 (cash investment) = $1.500.000
2.Investors' ownership percentage = $500.000 / $1.500.000 = 33.33%
3.Founding team's ownership percentage = 100% – 33.33% – 20% (employee option pool) = 46.67%
4.Total outstanding shares = (1.000.000 / 46.67) x 100 = 2.142.704 (shares) (Explanation: because the founder's 1.000.000 shares represent 46.67% of the equity, applying proportional calculation gives the number of shares corresponding to 100% of the company)
5.Since we know the total outstanding shares, we can calculate: shares in the employee option pool = 2.142.704 shares x 20% = 428.541 shares
6.Number of shares the investor owns = 2.142.074 shares x 33.33% = 713.953 shares
7.Since $500.000 buys 713.953 shares, the price of each share in the business at this point = $500.000 / 713.953 shares = $0.7 / share
8.Check again: (Number of shares held by the founder + number of shares in the employee stock option pool) x price per share = Pre-investment value of the business.
(1.000.000 + 428.541) x 0.7 = $999.978,7 (difference: $21.3)
Thus, your calculation is correct.
The business’s capitalization table at that point is as follows:
|
Owners |
Number of shares (shares) |
Ownership value ($) |
Rate (%) |
Share price ($) |
|
The founding team |
1.000.000 |
$700.000 |
46.67% |
$0.7 |
|
Employee fund |
428.541 |
$299.979 |
20% |
|
|
Investors |
713.953 |
$500.000 |
33.33% |
|
|
Total |
2.142.074 |
$1.500.000 |
100% |
*Reference: Venture Deals – Brad Feld & Jason Medelson
TMT
Tạ Minh Tuấn – TMT – is a successful entrepreneur pioneering several startup fields in Vietnam, 1 of Vietnam's 30 most outstandingly successful and influential people in the prestigious “30 Under 30″ ranking by Forbes, the world's leading business magazine, and the founder of YUP! Start-Up Education & Incubation Centrer (www.yup.edu.vn).
