Rana K Gupta, manager of Greentown Labs member Felsuma, used to be a venture capitalist (VC). As a VC, if he was seriously considering an investment in a company, one of the most important documents he reviewed was the company’s capitalization table. He’s also had experience on the other side of the table, as an entrepreneur who’s raised both VC and angel funding. Given the importance of capitalization tables, Gupta decided to share his unique perspective at a Lunch and Learn with the Greentown community.
Why did Gupta care so much about a company’s capitalization table?
Capitalization tables “tell a story.”
A capitalization table, or cap table, shows ownership—percentages and shares—of a company at each stage of its financial maturity. But Gupta thinks cap tables tell a lot more than that—they show how a company’s leadership has managed the equity, whether they’ve achieved their milestones, and “the events that shaped the ownership.” Importantly, it also enumerates how your share price has increased or decreased as you’ve progressed.
As you add investment rounds to your cap table, Gupta emphasizes there’s something you have to keep in mind.
The venture capital “equity game” is one of milestones and valuation.
The goal is to exceed the milestones agreed upon with investors, to grow your company’s valuation and make you attractive for more funding.
However, those milestones can be hard to reach—and if your company doesn’t meet them, you’re likely going to be the ones who take the fall. That’s because of common and preferred shares. Management typically has common shares, which get diluted disproportionately if a company has to raise more funds at a lower stock price (called a “down round”). Venture capitalists, however, usually purchase preferred shares, which protect them either partially or completely from dilution.
Want to learn more? Check out Gupta’s full presentation here!
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