Cap Tables & Stock Options 101

Welcome to the final post of Tandem Innovation Group’s first blog series: Startup Financial Management 101! In this four-part series, we provided the basics of managing your startup’s finances. From breaking down key concepts to providing tips and illustrating through examples, this series is the go-to resource for entrepreneurs. Curated with the expertise of Tandem network professionals, we want to make it simple for you to understand your startup’s finances.

Today we are looking at cap tables and stock options. We will be explaining what these are, why they are important, and how you can use them to propel your startup to the next level.

 

What Are Cap Tables?

Capitalization tables, otherwise known as cap tables, are a breakdown of a company’s shareholders’ equity. Cap tables show all of equity ownership capital, including common shares, preferred shares, options, and convertible equity. They list out each type of equity ownership, the individual investor, and the share prices/investments.  

 

What Are the Different Fundraising Rounds?

There are five key fundraising rounds, each of which involves a different type of investor and stage of company development.

The Seed round generally involves a raise between $500k- $2M. With a valuation of approximately $3-6M. Anything before that is a pre-seed.  Anything more than that can sometimes be considered a Series A where you are raising between $2-$15M, where the valuation is between $10-$30M. Your valuation will likely depend on how much you need and how much you are willing to give up.

What Are Employee Stock Options?

Employee stock options are a type of equity compensation for employees. Instead of granting shares of stock directly, the company gives derivative options on the stock. There are pros and cons to this compensation structure.

There are six key characteristics that define each stock option:

  1. Grant price/exercise price/strike price – the specified price at which your employee stock option plan says you can purchase the stock.
  2. Issue date – the date the option is given to you.
  3. Market price – the current price of the stock.
  4. Vesting date – the date you can exercise your options according to the terms of your employee stock option plan.
  5. Exercise date – the date you exercise your options.
  6. Expiration date – the date by which you must exercise your options or they will expire.

What Are Preferred Shares and Convertible Debt?

Common shares are more suitable for long-term growth investors. Preferred shares and convertible debt are better for more risk-averse, yield-seeking investors who still want some upside potential.  

 

The following compares common shares, preferred shares, and convertible debt on seven key dimensions:

That concludes our series!

Our goal at Tandem is to make it easy for you to establish a sound financial platform to build your business on. This is the end of our series, but feel free to check out our previous posts on Cash Flow, Financial Modelling, and How to Ensure Your Startup is Making Money

Our Contributors

Jacinthe Koddo – Contract CFO/COO, Tandem Co-Founder & Director of Client Experience

Tania Lo – Contract CFO/COO, Tandem Co-Founder & Managing Director

Matthew Stevens – Contract CFO

Teresa Pang – Contract CFO

Additional Resources

What are cap tables?

What is shareholder’s equity?

What is owner’s capital?

What are common shares?

What is preferred stock?

What are stock options?

What is convertible equity?

What are employee stock options?

What is redemption value?

What are dividends? 

 

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