Angel Investors Cap Table Modeling

An angel investors cap table is used to show the effect on the percentage ownership of a business following the introduction of seed capital.

A business angel is usually an individual who invests their own money to provide seed capital to high risk startup businesses which do not have access to capital markets or the necessary security to raise debt finance.

The seed capital is used to bridge the gap between small investments from friends and family (pre-seed funding), and the much larger funding provided by venture capital finance.

Angel Investors Cap Table Example

A business has the pre-seed investors cap table shown below following the introduction of funding by family and friends.

Pre-seed investor cap table prior to angel investment
Holder Shares/Options %
Pre-seed investors 140,000 11.29
Founders 950,000 76.61
Team 50,000 4.03
Options pool 100,000 8.07
Total 1,240,000 100.00

Prior to the angel investment the founders have 950,000 shares representing 76.61% of the issued shares and options. In addition 50,000 shares have been issued to members of the team and a further 140,000 (11.29%) shares issued to pre-seed investors. The pre-seed investors had also required the creation of an options pool of 100,000 (8.07%) options.

The creation of this cap table prior to angel investment is more fully discussed in our post on pre-seed investment cap tables for startups.

Increasing the Stock Options Pool

Suppose now that the business is seeking an investment from business angels of 612,000 to fund product development, market research and prototype production.

The business has found angel investors who are prepared to provide the necessary finance at an agreed pre-money valuation of 2,448,000, but before investing they require an increase in the stock options pool of 120,000 options to enable the business to recruit and incentivize the necessary key personnel required to implement their growth.

Based in this information the share price before the angel investment is calculated as follows.

Current shares and options = 1,240,000
Stock options increase = 120,000
Total shares and options = 1,360,000
Pre-money valuation = 2,448,000
Share price = Pre-money valuation / Total shares and options
Share price = 2,448,000 / 1,360,000 = 1.80

The share price prior to the angel investment is 1.80.

The options pool now holds 220,000 (100,000 + 120,000) options. The effect of the granting of stock options is more fully discussed in our post on stock option pools.

Angel Funding

Without the increase in the options pool the share price would have been 1.97 (2,448,000/1,240,000). The effect of increasing the options pool is to reduce the share price prior to investment to 1.80 thereby increasing the number of shares the investors receive for their investment of 612,000.

The number of shares due to the investors in return for their investment is calculated as follows.

Share price = 1.80
Angel investment = 612,000
Number of shares = Investment / Share price
Number of shares = 612,000 / 1.80 = 340,000

Pre and Post Money Valuation

The post-money valuation for the business is simply the pre-money valuation plus the new investment.

Post-money valuation = Pre-money valuation + Investment

The table below summarizes the pre-money and post-money valuations and shows the effect of increasing the options pool and the issue of shares to the angel investors.

Pre-money and post-money valuations
Shares/Options Value
Pre-seed investors 140,000
Founders 950,000
Team 50,000
Options pool 220,000
Pre-money valuation 1,360,000 2,488,000
Angel Investment 340,000 612,000
Post-money valuation 1,700,000 3,060,000

In this example the pre-money valuation is 2,448,000 which together with the investment of 612,000 gives a post-money valuation of 3,060,000. The total number of shares in issue is now 1,700,000 and the angel investors cap table is set out as follows.

Angel investors cap table
Holder Shares/Options %
Angel investors 340,000 20.00
Pre-seed investors 140,000 8.24
Founders 950,000 55.88
Team 50,000 2.94
Options pool 220,000 12.94
Total 1,700,000 100.00

The angel investors cap table shows that for their 612,000 investment the investors receive 340,000 shares representing 20.00% of the total shares and options in issue. In addition the options pool now contains 220,000 stock options equivalent to 12.94% of the total.

Founders are Diluted

The effect of obtaining angel funding and increasing the options pool is to dilute the founders.

After the angel investment the number of shares held by the founders is still 950,000, however, the total number of shares and stock options is now 1,700,000 and therefore the percentage ownership of the founders reduces as shown in the table below.

Founders are diluted
Holder % Before % After
Founders shareholding 950,000 950,000
Total shares and options 1,240,000 1,700,000
% Ownership 76.61% 55.88%

The founders who previously held 76.61% of the business are diluted and now hold only 55.88%.

Likewise the team of key personnel and the pre-seed investors are also diluted as shown in the table below.

Dilution due to angel investment and options pool increase
Holder % Before % After
Pre-seed investors 11.29 8.24
Founders 76.61 55.88
Team 4.03 2.94
Options pool 8.07 12.94
Angel investors 20.00
Total 100.00 100.00

Angel Investors Cap Table and Financial Projections

In the above example the angel investment was 612,000. The amount represents additional equity for the business and needs to be entered in the financial projections template as new capital in the cash flow.

When producing financial projections it is recommended that the amount of equity capital needed to fund the business is determined first using the financial projections template.

The angel investors cap table should then be drawn up to show how the necessary equity capital will be provided. In any event the equity shown in the financial projections template should always agree with that shown on the angel investors cap table.

The granting of stock options to key personnel is a method of compensating them for providing their services and usually creates an expense for the business. The expense is the number of options granted multiplied by the fair value of each option at the date of grant, and is included in the financial projections template income statement as an expense allocated over the vesting period of the options.

Summary

It is important to understand the effect of obtaining angel investment and the increase in the stock options pool on the fully diluted angel investors cap table.

Angel investors usually require the options pool to be created prior to their investment to ensure they are not diluted. The effect of the options pool is to reduce the share price prior to investment and to increase the number of shares issued to the angel investors.

Each time the business seeks outside investment or increases the size of the options pool the founders are diluted and the percentage of the business they own reduced.

Angel Investors Cap Table Modeling October 3rd, 2017Team

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