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Category: Fundraising

Category: Fundraising

Cap Tables with Carta: Best Practices for Startup Founders

One of the first steps in forming a startup should undoubtedly be creating your cap table. But cap tables can get complicated quickly. It sounds simple, but without a good one it is far too easy to make bad equity decisions when raising money and hiring which can become costly and difficult to fix.

Whether you’re new to this topic or need a refresher, it’s often best to learn from examples and the people that think about this every day. As investors we have seen hundreds of cap-tables both good and bad – but to layer even more insights we spoke with the folks at Carta in our webinar about the topic. This post will share the learnings. 

Here is what we will cover:

  • What a cap table is and why it’s important for all stages of company building.
  • How prospective investors will look at your cap table. 
  • Key terms to dive deep on. 
  • Common cap table mistakes and how to avoid them  
  • How to think about managing your cap table and tools available to you.

Structuring Your First Cap Table

A capitalization table is a tool used by startups to show the overall capital structure of their company, manage the ownership stakes of each equity holder, and keep track of every security their company has issued as well as who holds them. In short, the cap table represents your startup’s investable story.

So why should you care? Cap tables are important for many reasons:

  • They help you raise money on better terms and understand your dilution.
  • The cap table can help you land and retain key talent.
  • They communicate what each investor and employee holds from an equity perspective. 
  • Clean cap tables can accelerate your VC financings.
  • Your cap table will grow and expand in both size and complexity as your company grows.
  • Lastly, they are a centralized repository – everyone’s source of truth when it comes to equity. 

In addition, prospective investors will look at your cap table to answer many questions that will help determine whether they will invest:

  1. What is the ownership percentage of the founders and key employees, and how vested are they?
  2. Are there any founders or key employees who have moved on? What is the story?
  3. How much is left in your option pool? Does it need to be topped up?
  4. What is the turnover within this company? Are there cultural issues?
  5. Who are the other investors in this company, and what do they hold?
  6. Are there any surprising preferences or obligations I can see?

Investors tend to zero in on points 1 and 5. 

Key Cap Table Terms Defined

When talking about cap tables, there are a number of terms either your lawyer, investor, or other startup folks will use. Knowing the jargon is helpful in understanding what exactly people are talking about. Let’s take a look at a few terms:

Common stock: Ordinary shares of stock, typically held by founders and employees.

Preferred stock: Shares of stock with special protections including a preference, meaning investors holding them will be paid back first in an acquisition before any common shares receive proceeds. If you ever negotiate a term sheet with an investor, you are likely negotiating the term of the preferred class of stock.

Pre-money valuation: Valuation assigned to the company for purposes of pricing new shares for investors.

Post-money valuation: Pre-money valuation for a financing round, plus the amount of new cash invested in that round. When you think about dilution, you want to know what the post-money ownership of everyone will be. This is the ownership you will have after the investment round.

Price per share: For an investment round, typically the pre-money valuation is divided by the fully diluted cap (# shares) just before that new round. Fully diluted is the key term here. It assumes all outstanding options/warrants, etc. are converted into shares. Therefore the fully diluted share count is likely higher than your current number of shares outstanding (more below). 

Stock Plan allocation (option pool): Known as your ESOP, these shares are reserved for issuance to employees under a stock plan.

Fully diluted capitalization: All shares that have been or are reasonably likely to be issued, including, all shares that have been issued and remain outstanding; plus all that could be issued under outstanding options; plus the remaining available option pool.

Common Mistakes in Cap Tables and How To Avoid Them

One of the most common and most avoidable mistakes involving cap tables is not having all your documents in order. It is important to keep data organized and documents on hand. Critical documentation may include any of the following: incorporation documents, stock purchase agreements, stock plan (option pool) documentation, any convertibles you’ve issued (SAFE/KISS), and any relevant board actions (e.g. written consents). 

Another common mistake involves poor planning. Take a backward design approach by delving into the critical factors that may affect cap table creation and your goals. Think about the answers to the six questions posed earlier in the article: what are investors looking for here? Share your plan and finalize your understanding of ownership with your co-founders, a well balanced cap table has many benefits. It can help founders be intentional about growth and distributing equity to employees. 

As investors, one of the biggest problems we come across is when founders don’t have their cap-tables up to date. As an entrepreneur, you should manage your cap table in an offensive manner. Be ready for the next financing or hire. Don’t manage it in a defensive manner, by cleaning things up upon request. There is nothing worse than having to spend a few hundred or thousand dollars cleaning things up because you didn’t keep the cap table up to date. Mistakes like this can often kill financing deals and render your company “uninvestable”.

Structuring Equity Compensation

Understanding equity compensation is critical to attracting and retaining key talent. Equity compensation plays a critical role in building a company culture that is positive, supportive, equitable, and growth-oriented. Everyone is an owner. 

The most common way of providing equity to your employees is through the option pool or ESOP. This pool represents a piece of the company that is reserved for employees. Investors will often ask you to “top up” the ESOP prior to a new financing so that there is enough equity for the key employees you need to hire post-money. 

Investor communication and issuances

Certain investors may have information rights as part of their agreements. This means that they will likely ask for periodic updates about your business, including cap table equity details. To ensure clear lines of communication you can:

  • Set up a cap table sharing if you are using a cap table management software
  • Make it a habit to send out quarterly or biannual investor updates
    • In addition to the cap table, send KPIs, financials, projections of business, etc

When building your cap table, you have to think about how you are going to manage it and the tools that are available to you. There are two main options: you can build your cap table from scratch or use cap table management software. 

If you are building it from scratch, you have the benefit of building it to your precise specifications, but it can be difficult to build, collaborate on and maintain (remember, you want to be offensive, not defensive). Cap table software is the easiest way to keep your cap table updated. It does cost money but likely saves on costs in the long run.

For more on this topic, you can watch our webinar with Carta below:

Pitch deck

A pitch deck is akin to a resume, but for your business. Your ultimate goal is not to get hired on the spot but rather to get an interview. Your goal with fundraising is similar – you won’t get funded based on your pitch deck alone, but it does get you that first meeting. 

As investors, we have seen all sorts of pitch decks, ranging from basic PowerPoints to professionally designed presentations. We’ve seen embedded videos, interactive presentations, and more. In this post and accompanying resource set, we want to break down what makes an effective pitch deck and help you get started on yours. 

“If you can’t tell the story of the company in five minutes then you’re either overthinking it or you haven’t simplified it down enough.” – Mike Vernal, Sequoia Capital

Pitch Deck Format for Early Stage Startups

Generally speaking, your early-stage pitch deck might have the following slides:

  • Logo & slogan
  • Problem + examples:
    • Using a story is a good way to explain the problem. See this example by Tinder.
    • You want to paint the picture that shows why you started the business in the first place. 
  • Solution + examples:
    • Walk through your product and the key features. 
    • Don’t be afraid to actually show readers your product. In fact, including screenshots or a link to a demo is one of the best ways to help readers to understand your solution. 
    • Unless your presenting to a technical audience – don’t spend too much time on the technical details. Those conversations are best reserved for meetings and product demos. 
  • Customer: 
    • Who exactly are you selling to? 
  • Market size
    • It’s important to be thoughtful here. Realistically, how much revenue is out there for you to capture?
    • Headline numbers from the big market research firms won’t cut it.
    • Jared Sleeper has a great article on how you can explain your TAM to investors.
  • Competition:
    • There is always competition. Be open and honest about competitors’ strengths and weaknesses. 
    • Then, showcase your competitive advantage and why you win. 
  • Traction:
    • Who have you already sold to?
    • What are the metrics around product usage? 
    • Are there any financial metrics worth mentioning?
    • Depending on what stage you are at, even major developmental milestones are good to include here. 
  • Business model:
  • Product Roadmap:
    • What are you looking to achieve in the next 12-18 months? 
  • Team:
    • Highlight the management team or key employees.
    • Answer the question: If there was an identical business somewhere in the world, why is this team the one that will make it work?
  • Funding ask & milestones:
    • If you don’t include this, it will probably be one of the first things an investor asks. 
    • Having your ask laid out openly helps investors understand if they are the right fit for your business. For example, you could be trying to raise too much money, or not enough money for them to be interested. It’s better to find out over email vs at the end of a meeting. 
    • Lastly, highlight the main milestones your looking to achieve with the funding round.
  • Thank you

DocSend has done the job of analyzing pitch decks and highlighting what investors tend to zero in on:

Pitch deck slide order and focus areas for successful pitches

Source: DocSend

Tips for Creating Your Pitch Deck

Some additional tips when creating your pitch deck:

  • Follow Guy Kawasaki’s 10/20/30 PowerPoint rule. In other words, use no more than 10 slides, 20 minutes of talking, and no font smaller than 30 pts. Template based on Guy Kawasaki
  • If your pitch deck is a bit longer, make sure to switch up the design elements. After all, no one wants to see the same slide with different metrics 20 times in a row. See example by Uber. Template based on Uber.
  • Design is important! Above all, use colors and fonts that align with your brand. In addition, make sure fonts are legible, and don’t use clashing colors. Use the psychology behind colors to evoke certain emotions.
  • Choose background images carefully. Make sure they have a similar color palette, for instance. See example by Crema
  • If you want to keep your background simple but representative of your brand, you can use textures to accomplish that. See example template for an eco-friendly startup.
  • Show how your product will benefit all the stakeholders involved, instead of just one type of user. In other words, focus on the end user, investors, community as a whole, etc. See example by Foursquare
  • Create FOMO for your fundraise. 
  • Use data to support your claims. For example, use infographics and charts to give an easy overview of things like the market size, any product claims your making, or how much the problem is costing users.
  • If your product is technical in nature, explain what it is and how it works first, before talking about traction.
  • Last but not least, be realistic. If there are known challenges, name them and show that you’ve thought about how to tackle them.

Pitch Deck Examples

Below we included some different examples of pitch decks from companies you’ll likely recognize:

  • AirBnB
    • Cover or title slide
    • Problem
    • Solution
    • Market Validation
    • Market Size
    • Product
    • Business Model <<< KILLER SLIDE!
    • Market Adoption
    • Competition
    • Competitive Advantages
    • Team Slide
    • Press
    • Users Testimonials
  • Uber
    • Cover or title slide
    • Problem
    • Solution
    • How it Works
    • Key Differentiators
    • Operating Principles
    • Product
    • Use-cases
    • User Benefits
    • Initial Service Area
    • Technology
    • Demand Forecasting
    • Overall Market
    • Composition of Market
    • Target Cities
    • Looking Forward
    • Smartphone Sales Info
    • Future Optimizations
    • Go-To Market: Marketing Ideas
    • Traction: Progress to Date
  • Tesla
    • Introduction
    • Team
    • Growth
    • Collaborations
    • Specificity on a model
    • Model S Slide
    • Strategic assets
    • Final Slide
  • Canva
    • Publishing Era’s
    • Gap in the market
    • Why Canva?
    • Market Segments
    • User-Cases
    • Syndication
    • Funding
    • Experience
    • Milestones

Slide Deck Resources

Fundraising: The Benefits of a Great Investor Update

When most people think of investor updates, they usually think about the quarterly results that publicly traded companies send out to investors and stakeholders. But, this practice shouldn’t be limited to just public companies. After all, going through the process of producing an investor update forces management to think about how the company has been progressing and the direction in which the company is going. It helps investors get on the same page so there are no surprises. 

Great investor updates can have long-lasting effects, benefiting both the company, the investor, and the relationship between the two.

Why send out investor updates? 

According to Visible, “Companies that provide regular investor updates are 300% more likely to receive follow-on funding”. Why? Because sending updates to investors makes you accountable to them. At the end of each period (whether that’s monthly or quarterly), people will be expecting to hear from you about how the company performed. This narrative tells how the company is progressing, showcases your team’s accomplishments, and lays out the plan for the future. It gives you an opportunity to explain any missteps your company made and how it’s recovering from them, along with any corresponding pivots your business has made or is planning to make. 

Investor updates allow you to construct a window into your business. This is a place where you can share big wins or ask for help. It is a place where you can share specific data points that may entice future investors (if that is your goal). Investor updates are all about showing momentum while being transparent along the way. Investors invest in lines, not dots

Another benefit of writing investor updates is that it allows you to reflect on the previous period for your own business. Ask yourself if you did what you said you were going to do. Did you get distracted? Did you surpass your expectations? These updates are a great forum for you to write a summary of what happened over the last cycle, whether it is good or bad. It gives you a chance to create a plan going forward into the next period.

What makes up a good investor update?

There is a balance between the length of an investor update and the type of information you provide. Most of the time, bullet points or one to two sentences about a particular topic will suffice. Give the recipients a high-level overview of what is going on in the business. If someone wants to know more about a certain topic, they can usually just ask. This does not give you an excuse to glaze over important data points, however, and some of the best investor updates are rich with data and commentary.

The stage of your business—whether you are pre-revenue, have a little revenue, or are well-established—will determine what type of data is even available for you to include in an investor update. Usually, the following data points are a good start. (Pick what applies to you and do not add something if it is not relevant.)

  • Revenue (MRR/ARR or run rate)
  • Sales funnel info (leads, demo calls, closed deals, etc.)
  • Burn/runway (ideally both)
  • Usage metrics (DAU, MAU) 

The metrics above are merely just a sample. Be sure to include anything that is relevant to your market, business model and/or sector, or that you think is important. I have seen some entrepreneurs go the extra step and create a dashboard that shows how these metrics have improved or declined over time. Something like this can be easily hosted in a “view only” Google sheet that is shared with everybody.

In addition to quantitative data, a nice add-on is some qualitative commentary to go with it. Here are some common items I have seen that help generate some action items for the reader:

  • What we need help with: Connections? Introductions? Hiring? Planning? Be open and honest in this section. It usually pays off and shows you which people are really invested in seeing you succeed. 
  • What keeps you up at night: Worries about missing an implementation deadline, leads are not converting, etc.
  • Big wins: What went really well this month?
  • Upcoming events/business schedule: Is your business an exhibitor at an upcoming conference? Are you participating in an upcoming pitch competition? Speaking at an industry event? This is your chance to showcase what things the business is doing publicly.

A section that I tend to like is your own analysis of the market and the business. This is more appropriate to do on a quarterly, or even an annual, basis. Something like this can be as long or as short as you want, but there is nothing better than knowing an entrepreneur is fully in tune with what is going on in the bigger picture. Discussion points can be notable M&A, new competition or changing competitive dynamics, any major funding rounds both private and public, and even macroeconomic trends that are evolving over time. This section is your opportunity as an entrepreneur to showcase your expertise in your market. It shows that you are able to operate on the day-to-day level as well as think about the big picture. And if you are looking to entice investors, remember that good investors are always thinking about the big picture.

Lastly, do not forget to include some fun things. This includes bullet points or short sentences around customer quotes, personal team wins, and product additions. You could even thank those who helped the business during the previous period. 

How to send an investor update:

Our favorite investor updates are quick and to the point—they don’t have to be multi-page PDFs, in fact usually less is more. The common mediums are via email or through a tool like HubSpot or DocSend. Tools like Visible, MailChimp, or Paper Street are common as well. Whichever method you choose, make sure your investor update is informative, engaging, and upbeat.

Investor updates are only one piece of the puzzle that is fundraising. If you’re interested in learning more about investor updates, fundraising, and how to create FOMO during your fundraise, then our last webinar with Visible is for you. You can watch the webinar on demand anytime, here: Creating FOMO In Your Fundraise – YouTube