Does The Cap Fit?

Your Capitalisation Table (Cap Table) shows who owns how many shares in your business and what happens in the event of an investment - in particular the amount of dilution you and your other current shareholders might suffer.

Enter your current share position

Let's say you started the business with 1,000 shares for yourself and when your first employee arrived you offered her 250 new shares because you couldn't pay her full market salary. You now own 80% of the business with a total of 1,250 allocated shares. Your shares have no value because the business has not been valued.

Value the business

The business goes well and you're looking for your first investment. In order to place some value on your are investor's shares, you have to value your business. Although you're not yet profitable, you do have some customers and have some Intellectual Property. You value the business at £200,000. That means with 1,250 shares allocated, each share is worth £160. On paper, your 1,000 shares are worth £160,000. Don't spend it just yet!

You invest some of your own money

This isn't mandatory, but you might feel that you want to show your new investors that you have confidence in the business, and you decide to invest £10,000 of your own money. Your employee also invests £5,000. At £160 per share, you buy 63 shares. Your shareholding goes down a fraction, despite your investment, because you now hold 1,063 shares out of a total of 1,344, which gives you 79%. Your employee's share goes up to almost 21%.

Your new investor invests

Your new investor buys 250 new shares for an investment of £40,000 and persuades a friend to also invest £20,000 for an additional 125 shares. That increases the total number of shares to 1,719 and gives your new investors 14.55% and 7.27% respectively.

So, you and your employee have invested £15,000 and two new investors £60,000, a total of £75,000. Your business is now valued at £275,000 post money. Each share is still worth £160.

You have been diluted from 80% to 61.82%, an almost 20% drop, which is quite a plummet, particularly as you invested £10,000 of your own money. For each £100,000 of additional pre-money valuation and you would have had (approximately) an additional 5% of the equity.

Your final Cap Table looks like this:

It's interesting to play around with the numbers to get an idea of how quickly you might get diluted. In this example, another 12% dilution and you've gone below 50%, unless you have a built in provision that your employee does not have voting shares. Or that your employee had share options rather than shares.

Contact me and I'll send you a blank Cap Table to try for yourself.

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