Equity
How to model new equity rounds in the Cap Table and Exit Waterfall Tool
What is a cap table?
A cap table is both a record and an analysis tool:
- The list of securities a company has issued, who owns them, how many, and what type
- An analysis tool to understand the impact of financing rounds
Pre-financing cap tables show current share classes and ownership. Pro-forma (post-financing) cap tables show the state after a round.
Authorized, issued, and fully-diluted shares
- Authorized — shares the company can legally issue per its operating and shareholder agreements. Can be changed by the board.
- Issued — shares actually owned by investors. Sum of all share classes, common and preferred.
- Fully-diluted — issued shares (on an as-converted basis) plus shares reserved for options and warrants.
Governance and control usually key off issued shares. Share price calculations usually key off fully-diluted. Authorized can be raised if the company needs more room.
Issuing Equity
A "priced round" issues shares at a valuation.
Premoney valuation / (Fully-Diluted Shares prior to the round + dilutive shares included in the calculation)
What's in the share count varies — see SAFEs and Convertible Notes.
Convertible Note
Debt that converts to equity at a milestone (a date or a financing event). Treated as unsecured debt.
Can include: discount rate (discount to equity price), cap (max valuation at conversion), interest rate (usually accrued, converted or paid at conversion), and maturity date.
Legal docs typically express a 20% discount as "80% of the equity price."
Example: Convertible Note by Fenwick.
SAFEs
SAFEs (Simple Agreement for Future Equity) are warrant-like rights to purchase shares. Not debt. Introduced in 2013 to simplify early-stage financings.
SAFEs can have cap or discount, no interest rate, no maturity.
The postmoney SAFE (2018, YC documents) replaced the premoney SAFE, defining conversion more precisely.
Effectively, the postmoney SAFE adds anti-dilution protection for investors. Debated: Why Startups shouldn't use YC's Post-Money SAFE; A Fix for Post-Money SAFEs; A CORRECTED "SAFE FOR FOUNDERS".
Postmoney SAFEs also removed prorata by default (reinstatable via side letter).
Raising a round
Taking in capital using one of the structures above, issuing securities at a determined price (or the right to purchase at a later price).
Rounds can aggregate multiple investments at different valuations, especially with convertibles.
SAFEs, convertible debt, and warrants list separately on a cap table — holders don't own shares yet. Share count at conversion depends on the next round.
Converting investments
Convertibles convert into equity when a priced round raises. Usually at a lower price than new equity — that discount is the reward for earlier risk.
Glossary
| Term | Definition |
|---|---|
| Investment Amount | New capital invested in a round |
| Premoney Valuation | Company value before a round |
| Postmoney Valuation | Premoney + amount invested |
| Company Capitalization | Definition of shares used in the price-per-share calculation |
| Price per Share | Premoney / shares in company capitalization |
| Common Shares | Common Stock |
| Preferred Shares | Preferred Stock |
| Authorized Shares | Shares the company can legally issue, per its docs and board |
| Issued and Outstanding | Shares currently held by shareholders. Less than authorized |
| Fully Diluted | Issued + reserved for authorized options, assuming all options are eventually granted and exercised |
| Fractional Shares | Rounded to avoid fractional issuance |
| Secondaries | Existing shares transferred between investors. No new money to the company |
Option pool math: Cap Table and Exit Waterfall Tool