Whither the Cap Table?

Big Red Car here.  The Boss is still up around the Sawtooth Mountains.  Lovely sunny days and spring skiing conditions.  Lovely place, Ketchum, Idaho.  As many folks in Idaho as in Austin but way better fly fishing.

OK, cold and rainy here in the ATX today but 80F by the weekend.  I can’t wait for the weekend.

So The Boss was talking to a CEO friend.  Salty.  Seasoned.  Successful.  The big S’s.

They got to talking about fundraising and cab tables.  On the strength of a few beers, this is what they had do say.

Keep the cap table up to date

A CEO should keep the cap table up to date at all times.  In the early days of any business, you’ve got a lot of important things to do.  Agreed.

You may have raised money from the lower end of the fundraising continuum — boot strapping, friends and family, angels — and have it all in your head.  Get it on paper.  Document the deal and the basis for the investment and make damn sure that the money — the investors — understand it the same way.  Document all the terms and appropriate dates.  If you are using convertible debt, know the pertinent dates.  Write it down.

Why?

It is vitally important to know the details of the cap table cold because in subsequent fundraising efforts this is exactly where you are going to start the next round.

Here are the reasons why:

1.  Existing investors are always a great source for subsequent funding.  Hey, they’ve already said YES once.  They are a better bet than a bunch of strangers.

Remember this — go see your existing investors first.  Are they happy?  Any changed circumstances?  Convertible note holders willing to consider converting?

2.  Any new investors will want to know what the earlier funding arrangement looks like as a guide to structuring a new deal.  They will want to know if the earlier investors are going to be in the next round.

New investors will want to know the prior valuation parameters and will find this out.  They will use this information to their own benefit.

3.  New investors will contact your existing investors as part of their due diligence on YOU and your company.  Trust me on this one.

Find out quickly what kind of recommendation you will receive.  You want to trumpet the good ones and be able to explain the bad ones.  [You, Old Sport, will not have any bad ones.  Because you are a brilliant CEO who has been working the cap table since the onset.]

4.  You will want to model a new cap table based on your proposed terms for the new money.  Make it. Study it.  Use it as a sales tool.

The cap table, in many ways, is the first page in the fundraising playbook.

Shoot, move, communicate

The cap table is not a dead document, a Dead Sea Scroll.  It is a link between you and the money.  It is a dynamic document and should lead to a dynamic flow of information.

Keep the money informed about your company every step of the way.  Use a periodic reporting format of some kind.

In the military back in the day they used to say: Shoot, Move, Communicate.  In this manner higher headquarters always knew where you were located and thus did not call friendly fire on your butt.

In the money raising and stewardship business — yes, YOU are a steward of OPM and never forget it — you have to keep your investors informed as what their money is actually doing.

This is the first step in subsequent fundraising.  Keeping the existing investors informed.

What now, brown cow?

Simple, if you are not up to date on the cap table, dig out the docs and get current.  Send a copy to the investors to ensure you are all on the same wavelength.

Communicate on a periodic basis to the investors as a prelude to your next round of fundraising.  Do it now.

Go back to your original investors first.  Maybe they will consider converting a convertible note prior to investing more money.  Give yourself a chance to get lucky.  Why not?

But, hey, what the Hell do I really know anyway?  I’m just a Big Red Car.  Be kind to someone you love today.  Make a new friend. 

 

 

  • JLM, it is amazing how much has changed in the last few years alone. VentureHacks (site) and Venture Deals (books) make it possible for a fundraiser to actually *understand* the terms of the deal. Just yesterday @msuster reposted 2.5 yr old one on some of it (the Options Pool Shuffle) http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/

    Absolutely crucial founders understand the cap table and its meaning at all times.

    When I ask a CEO, I expect a few numbers to be at the top of their head at all times: revenue, gross margins, cash on hand, market share, churn (esp for a SaaS business), CAC, cap table, a few others. If they don’t have it, guaranteed their business is in trouble and they don’t know it.

    • JLM

      .
      The voice of experience.

      Well played.

      BRC
      .

  • alanmcgee

    The cap table, in many ways, is the first page in the fundraising playbook.

    exactly this, and informed investors make for better supporters and advocates throughout the life of the business.

    • JLM

      .
      Bingo! Well played.

      BRC
      .