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The Art of Startup Finance: Financial Foundations - Your Capitalization Table - YouTube
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Bill Reichert, Financial Foundations, Capitalization
Table
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>>> Most important to investors, they're going
to look at your cap table, your capitalization
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table. How you have raised money and who owns
the company. So it's a part of your shareholders'
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equity section of your balance sheet. The
cap table shows the different classes of ownership
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in your company.
Inside your cap table you're going to have
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the people who own common stock. Generally
that's the founders. It may also include some
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employees, and maybe even some advisors who
might have common stock. It will also show
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stock options. And those are options that
are going to be granted or have been granted
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generally to employees that will in the future
become owners of your company. But they're
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not generally issued yet, so there's a reserve
for stock options.
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The other thing that may show up in your cap
table are warrants. This is sometimes confusing
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to entrepreneurs because it's unclear, what's
the difference between an option and a warrant.
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Well, an option generally is governed by regulations
regarding qualified stock options, which the
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IRS regulates in terms of their taxability.
Warrants are the more standard form of financial
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instrument, which are really an option to
buy stock in your company at some point in
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the future as a fixed price. That's what a
warrant is. Frequently companies, startup
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companies, will issue warrants in conjunction
with doing things like a lease or doing things
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like debt. So you may find out that you have
warrants on your cap table.
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The next thing is preferred stock. So when
you have an investor like a venture capital
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firm invest in your company, most likely that
investor is going to insist that they get
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preferred stock in your company. Now what's
the difference between preferred stock and
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common stock? Just as it sounds, preferred
stock has preference over the common stock.
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The preference generally relates to having
an advantage when the company is liquidated
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or sold, the preferred stock gets their money
back first before the common stock. The preferred
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stock may also have some other preferences
written into the contract when you sell the
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preferred stock.
The last topic I want to touch on in your
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capitalization table is convertible notes.
Now we generally recommend for very early鈥憇tage
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startup companies, when you raise money from
friends and family, even if you're raising
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money from angel investors, rather than creating
preferred stock, what you can do is create
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a convertible note; a debt instrument that
is convertible into equity. So it's a great
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tool for raising money from friends and family
and from smaller investors.
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The idea of a convertible note is we aren't
sure exactly how to price the value of your
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company now, but we know we want to be part
of it and when a bigger investor comes into
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your company, we want our investment in your
company to convert on the same terms or even
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better terms than that new investor. So those
are called convertible notes. Those need to
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show up in your capitalization table as well
so that any investor who comes along to look
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at your company can see all the different
people who have been involved in founding,
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co鈥慺ounding, working for, advising and investing
in your company. Just make sure that you've
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got a complete, detailed capitalization table
that is聽up鈥憈o鈥慸ate聽all the time.
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