Establishing a solid foundation for a startup’s financial structure is crucial, especially to attract and build confidence with investors. Fundamental to your financial structure is the construction of a clean cap table. 

💡A cap table (or capitalization table) is a document, like a spreadsheet or a table, that details ownership shares in a company. It lists all the securities or number of company shares, including stock, convertible notes, warrants, and equity ownership grants.

Using SAFE notes can be an effective strategy for early-stage companies seeking capital. Understanding how SAFE notes affect your cap table is essential for proper financial management and successful fundraising from venture capitalists (VCs). In this guide, we delve into the intricacies of building a pre-seed cap table using SAFE notes and how to calculate equity for advisors and employees.

💡A SAFE note is a financial instrument used in startup investing that allows investors to provide capital to a startup in exchange for a promise of future equity, hence the term Simply Agreement for Future Equity.

Understanding SAFE Notes and Their Impact on Cap Tables

A SAFE note is an agreement between an investor and a startup, allowing the investor to invest money in exchange for future equity when a specific triggering event occurs, typically a future equity financing round or a liquidity event. One of the key advantages of SAFE notes is their simplicity compared to traditional equity instruments, such as convertible notes or equity financing rounds.

However, calculating the fully diluted share percentage for SAFE notes involves a few crucial considerations. SAFE notes typically do not have a valuation or an interest rate but instead convert into equity at a discount or a valuation cap during a future financing round. 

To calculate the impact of SAFE notes on the cap table, follow these steps:

• Understand the Terms: Determine the discount rate or valuation cap specified in the SAFE notes.
• Calculate Conversion Price: When a triggering event occurs (e.g., an equity financing round), the SAFE note converts into equity at a price determined by either the valuation cap or the discounted valuation from the round.
• Calculate Ownership: Divide the amount of the SAFE note investment by the conversion price to determine the number of shares issued to the investor.
• Include in the Cap Table: Add the investor's shares to the existing shareholder count, adjusting the fully diluted share percentage accordingly.

Calculating Advisor Equity

Advisors play a crucial role in guiding early-stage startups. Determining equity for advisors usually involves a negotiation based on their contribution, time commitment, and industry expertise. 

Here’s how to calculate advisor equity:

• Define Contribution: Assess the advisor's role, time commitment, and the value they bring to the company.
• Determine Equity Grant: Negotiate a fair equity grant based on vesting schedules and the advisor's contributions. Typical ranges are between 0.1% to 1%.
• Incorporate in Cap Table: Add the allocated advisor equity to the cap table under an advisory pool or individual advisor grants.

Calculating Employee Equity

Employee equity is often structured through stock option plans. To calculate employee equity:

• Allocate Option Pool: Set aside a portion of the company's equity for employees. This pool can range from 10% to 20% of the company's total shares.
• Grant Options: Offer employees stock options based on their role, contribution, and tenure. Vesting schedules are common, usually over a four-year period.
• Incorporate in Cap Table: Include the granted options in the employee option pool, and as they vest, allocate actual shares to employees.

Importance of a Clean Cap Table

Maintaining a clean cap table is pivotal for proper financial management and attracting VC investment. A clean cap table accurately reflects ownership percentages, simplifies due diligence for investors, and minimizes complications during financing rounds.

Cap Table Template 

Here's a template of a simple cap table tailored for a pre-seed startup with 28 angel investors across two SAFE notes (one with a $4 million valuation cap and one with a $7 million cap), three co-founders, six advisors, and an employee incentive plan.

Download our Cap Table Google Sheet Template»

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The Cap Table Google Sheet Template is designed to be user-friendly, allowing startups to input their specific data and instantly have a one-page investor-friendly format. If you’re looking for a resource more nuanced than a waterfall analysis, a complex cap table template by Slidebean can be found here.