How to Evaluate a Cap Table When Joining a Startup

How to Evaluate a Cap Table When Joining a Startup: A Comprehensive Guide

Joining a startup as an early employee can be an exciting and potentially lucrative opportunity. However, before accepting the offer, it’s essential to evaluate the company’s capitalization table, or “cap table” for short. A cap table provides an overview of a company’s ownership structure, outlining the various classes of shares and their respective ownership percentages. By examining a cap table, potential employees can gain valuable insights into the company’s financial health and growth potential. In this article, we’ll provide a comprehensive guide on how to evaluate a cap table when joining a startup.

1. Understand the Basics of a Cap Table

A cap table is a spreadsheet that outlines the ownership structure of a company. It typically includes the following information:

  • Founders’ shares
  • Option pool shares
  • Investors’ shares
  • Convertible notes
  • Outstanding warrants
  • Preferred shares
  • Common shares

Understanding the basics of a cap table is essential before diving into its evaluation.

2. Analyze the Cap Table to Determine Ownership

Analyzing a cap table enables potential employees to determine how much ownership they’ll have in a company if they decide to join. They’ll also be able to evaluate whether the company’s founders, investors, and other stakeholders have a disproportionate amount of equity. This analysis will give potential employees an overview of how ownership is distributed within the company, which is essential information when considering a job offer.

3. Examine Funding Rounds

Examining the funding rounds is an essential part of evaluating a cap table. It provides insights into how much money the company has raised so far, who the investors are, and whether the company has a well-diversified investor base. A comprehensive understanding of funding rounds will also help employees determine the company’s runway, or how long it can continue to operate before needing additional funding.

4. Evaluate the Option Pool

Startups typically use an option pool to incentivize employees with equity awards. An option pool is a predetermined percentage of the company’s fully diluted shares reserved for employee equity awards. Evaluating the option pool is essential to understand whether the company has enough equity available for future employees and whether the company has a fair and transparent policy for distributing equity to employees.

5. Understand the Vesting Schedule

Understanding the vesting schedule is critical when evaluating a cap table. It determines when employee shares fully “vest,” or become available to sell or transfer. A vesting schedule will typically outline the timeline, percentage of shares vested, and any triggering events that may accelerate the vesting period. Examining the vesting schedule is crucial to understanding how long an employee must remain with the company before receiving the full benefit of their equity awards.

6. Seek Expert Advice

Evaluating a cap table is a complex process that requires expert advice. Potential employees should seek advice from a lawyer, accountant, or other financial expert to help them understand the nuances of a cap table evaluation.

Conclusion

Evaluating a cap table is a crucial step when considering joining a startup as an early employee. Understanding the company’s ownership structure, funding rounds, option pool, vesting schedule can provide valuable insights into the company’s financial health and growth potential. By seeking expert advice and analyzing the cap table, potential employees can make informed decisions about whether to accept a job offer or negotiate for a better equity package.