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Concept Stage:
Capital Structure:
Who's going to own how much of your company.
By
Gerald Youngblood
Managing Partner, seedstage.com |
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Capital structure
defines the ownership of a company over time. It is established through a capital
plan, which is a forecast of future financing rounds and their respective impact
on ownership for each shareholder. A capital table (cap table) provides a quick reference
as to the exact ownership at a given point in time by class of stock.
Why
It's Important
Investors will want this
information before they will consider investing in your company. It's also important
to you, for understanding the actual impact of future financing on your ownership.
How It
Works
Most technology companies
are structured as "C" corporations with two or more classes of stock: common
and preferred. Preferred stock is entitled to a preference on dividends and liquidation.
Typically, founders and employees will be issued common stock and options, and investors
will receive one or more series of preferred stock, that is, Series A, Series B,
etc. To see an example, you can download Microsoft Excel spreadsheets for capital
plan and cap table here. |
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| DO: |
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- Complete a capital
plan and review it with your legal and accounting counsel.
- Plan for more capital
than you think you need.
- Plan for a stock
option pool equal to approximately 20% at the seed stage round.
- Plan a 20X return
for the seed stage investor within three to five years.
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| DON'T: |
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- Over-value your company
in the early stages to the extent that your early investors will lose value on future
rounds.
- Create a complicated
financing structure that will hinder or prevent future investment.
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