Cap table management Streamlining Cap Table Management: Best Practices for Startups

1. Understanding Cap Tables

1. Equity Ownership Breakdown:

- A cap table typically starts with the initial equity issuance during the company's formation. Founders, early employees, and investors receive shares in exchange for cash, services, or intellectual property.

- Example: Imagine a startup, XYZ Inc., with three founders. Each founder receives 33.33% of the company's equity. As the company grows, additional rounds of funding dilute these percentages.

2. Common Components:

- Common Shares: Represent ownership in the company and entitle shareholders to voting rights and dividends.

- Preferred Shares: Typically held by investors, these shares come with special rights (e.g., liquidation preferences, anti-dilution protection).

- Convertible Notes: Short-term debt instruments that convert into equity upon a future financing round.

- Options and Warrants: Used to incentivize employees and consultants with the right to purchase shares at a predetermined price.

- Example: XYZ Inc. Issues 10,000 common shares to each founder and 50,000 preferred shares to an angel investor.

3. dilution and Anti-dilution Mechanisms:

- Dilution occurs when new shares are issued, reducing existing shareholders' ownership percentages.

- anti-dilution provisions protect investors from excessive dilution. Common types include full ratchet and weighted average.

- Example: If XYZ Inc. Raises a Series A round, the founders' ownership may decrease due to the issuance of new preferred shares.

4. Scenario Analysis:

- Cap tables allow modeling different scenarios (e.g., funding rounds, employee stock grants) to understand their impact on ownership.

- sensitivity analysis helps founders make informed decisions about fundraising and hiring.

- Example: What if XYZ Inc. Raises $1 million in Series B funding? How does it affect founder equity?

5. Employee Equity Grants:

- Startups often grant stock options or restricted stock units (RSUs) to employees.

- Vesting schedules ensure employees earn their equity over time, incentivizing long-term commitment.

- Example: XYZ Inc. Grants 1,000 stock options to an engineer with a 4-year vesting period.

6. Exit Scenarios:

- Cap tables become critical during exits (e.g., acquisition or IPO).

- Liquidation preferences impact how proceeds are distributed among shareholders.

- Example: If XYZ Inc. Is acquired for $10 million, preferred shareholders receive their liquidation preference first.

7. Software Solutions:

- Managing cap tables manually can be error-prone. Startups use specialized software (e.g., Carta, Capshare) to automate calculations and maintain accurate records.

- Example: XYZ Inc. Adopts Capshare to track equity grants, vesting, and ownership changes.

In summary, cap tables serve as dynamic blueprints for a startup's ownership journey. By understanding their nuances, founders can make informed decisions, investors can evaluate risk, and employees can participate in the company's success. Remember that cap tables evolve with each funding round and transaction, so regular updates are essential.

2. Importance of Accurate Cap Table Management

1. Equity Transparency and Clarity:

- A well-maintained cap table provides transparency to all stakeholders, including founders, employees, investors, and potential investors. It outlines who owns what percentage of the company and how that ownership might change over time.

- Imagine a scenario where an investor expresses interest in funding your startup. Without an accurate cap table, you might struggle to provide a clear picture of existing ownership, leading to confusion and potential deal delays.

2. Investor Confidence and Due Diligence:

- Investors conduct thorough due diligence before investing. An accurate cap table demonstrates professionalism and instills confidence in potential investors.

- Inaccuracies or missing information can raise red flags. For instance, if the cap table fails to account for convertible notes or outstanding warrants, investors may question the startup's financial health.

3. Avoiding legal and Compliance issues:

- Startups operate in a complex legal landscape. Accurate cap table management ensures compliance with securities laws, tax regulations, and contractual obligations.

- Consider a situation where an employee exercises stock options. If the cap table doesn't reflect this accurately, the company could face legal repercussions.

4. strategic Decision-making:

- Founders and executives rely on cap table data to make informed decisions. Whether it's issuing new equity, planning an exit, or negotiating with investors, accurate information is crucial.

- Example: A startup wants to raise additional funding. An up-to-date cap table helps determine how much equity to allocate without diluting existing shareholders excessively.

5. employee Motivation and retention:

- Employees often receive equity as part of their compensation. An accurate cap table ensures that employees understand their ownership stakes.

- Suppose an employee believes they own 1% of the company but later discovers it's only 0.5%. Their motivation and loyalty may suffer.

6. Scenario Planning and Modeling:

- Startups need to model various scenarios—fundraising rounds, exits, employee stock grants, etc. An accurate cap table facilitates these projections.

- For instance, when negotiating a term sheet, founders can simulate the impact on ownership percentages under different valuation scenarios.

7. Tracking Dilution and Valuation Changes:

- As a startup grows, it raises capital, issues stock options, and experiences valuation changes. An accurate cap table tracks these events.

- Without proper management, dilution can catch founders off guard. Imagine realizing too late that your ownership has significantly decreased due to multiple funding rounds.

Examples:

- Convertible Notes: Suppose your startup raised funds through convertible notes. Accurate cap table management ensures that these notes convert correctly when the trigger event occurs (e.g., a priced equity round).

- employee Stock options: When granting stock options to employees, the cap table should reflect the strike price, vesting schedule, and any performance-based conditions.

- Secondary Sales: If early employees or investors sell their shares in secondary markets, the cap table must capture these transactions accurately.

In summary, startups must treat cap table management as a strategic priority. By maintaining accuracy, transparency, and compliance, founders can navigate growth, attract investors, and empower their team effectively. Remember that the devil is in the details, and a well-organized cap table can make all the difference in a startup's journey.

3. Creating and Maintaining a Cap Table

1. Initial Setup and Data Entry:

- accurate Data collection: Begin by gathering all relevant information related to equity ownership. This includes details about founders, employees, investors, and any other stakeholders who hold equity. Ensure that you have accurate records of stock issuances, option grants, convertible notes, and any other equity-related transactions.

- Common Data Points: Your cap table should capture essential data points such as:

- Founder names and ownership percentages.

- Employee stock options (vested and unvested).

- Preferred and common stockholders.

- Convertible securities (convertible notes, SAFEs, etc.).

- Warrants and other equity instruments.

- Software Tools: Consider using cap table management software to streamline data entry and calculations. Tools like Carta, Capshare, or EquityZen can automate many aspects of cap table maintenance.

2. Equity Types and Classes:

- Common Stock: Founders and employees typically hold common stock. It represents ownership in the company and carries voting rights.

- Preferred Stock: Investors (such as venture capitalists) often receive preferred stock. It comes with certain privileges, such as liquidation preferences and anti-dilution protection.

- Convertible Securities: Convertible notes and SAFEs can convert into equity at a later stage. Track these carefully to avoid surprises during funding rounds.

- Classes and Series: As your startup grows, you may issue different classes or series of stock (e.g., Series A, Series B). Each class may have distinct rights and preferences.

3. Ownership Changes and Dilution:

- Dilution: Understand that additional funding rounds or stock issuances will dilute existing shareholders. Dilution is inevitable but can be managed strategically.

- Fully Diluted vs. Issued and Outstanding: Calculate ownership percentages based on fully diluted shares (including options and warrants) rather than just issued and outstanding shares.

- Scenario Planning: Use your cap table to model different scenarios. What happens if you raise capital? How does it impact ownership?

4. Employee Equity Grants and Vesting:

- Equity Incentives: Startups often grant stock options or restricted stock units (RSUs) to employees. These serve as incentives and align employee interests with company success.

- Vesting Schedules: Specify vesting schedules (e.g., 4-year vesting with a 1-year cliff) to ensure retention and fair treatment.

- Acceleration Clauses: Consider acceleration clauses for key employees in case of acquisition or change of control.

5. Transparency and Communication:

- Regular Updates: Keep your cap table up to date after every equity-related transaction. Shareholders should have access to the latest version.

- Educate Stakeholders: Explain the cap table to founders, employees, and investors. transparency builds trust.

- Board Approval: Major cap table changes (e.g., new funding rounds) often require board approval.

6. Exit Scenarios and Liquidity Events:

- IPOs and Acquisitions: When your startup goes public or gets acquired, the cap table plays a critical role. Investors and employees will realize their gains based on their ownership percentages.

- Secondary Sales: Secondary transactions allow early investors or employees to sell their shares before an ipo or acquisition.

Example Scenario:

Suppose Startup XYZ has three founders: Alice (40%), Bob (30%), and Carol (30%). They issue convertible notes to raise seed funding. Later, they raise a series A round from a venture capital firm. The cap table evolves as follows:

- Pre-Seed:

- Founders: Alice (40%), Bob (30%), Carol (30%)

- Convertible Notes: $100,000

- Series A:

- New Investor: 20%

- Founders: Alice (35%), Bob (26%), Carol (26%)

- Convertible Notes Converted: $100,000

- Total Fully Diluted Shares: 1,000,000

In this example, the cap table reflects ownership changes due to funding rounds and conversions.

Remember, maintaining an accurate and well-organized cap table is essential for long-term success. Regularly review and update it as your startup grows, and seek legal and financial advice when needed.

4. Common Mistakes to Avoid

1. Delaying Cap Table Setup:

- Mistake: Waiting too long to establish a cap table can lead to confusion and inaccuracies. Founders often focus on product development and fundraising, neglecting proper record-keeping.

- Insight: Start early! Create a cap table as soon as you issue equity (e.g., founder shares, employee stock options, convertible notes).

- Example: Imagine a startup that grows rapidly but lacks a cap table. When they finally create one, discrepancies arise, causing disputes among stakeholders.

2. Ignoring Dilution Effects:

- Mistake: Failing to understand how equity issuance impacts ownership percentages. Dilution occurs when new shares are issued, reducing existing shareholders' stakes.

- Insight: Regularly update the cap table to reflect new rounds of funding, employee grants, and other equity events.

- Example: A founder who doesn't account for dilution might be surprised when their ownership percentage decreases significantly after a funding round.

3. Misclassifying Equity Grants:

- Mistake: Treating all equity grants equally. Different types (common stock, preferred stock, options) have distinct rights and preferences.

- Insight: Understand the hierarchy. Preferred stockholders have priority during exits, and options represent future ownership.

- Example: A startup mistakenly treats employee stock options as common shares, leading to confusion during an acquisition.

4. Incomplete Documentation:

- Mistake: Failing to document equity issuances properly. Missing details can cause disputes and legal challenges.

- Insight: Record every transaction—issuance date, recipient, type of equity, vesting schedule, and any conditions.

- Example: A company faces litigation because they can't prove an employee's stock grant terms.

5. Ignoring Tax Implications:

- Mistake: Not considering tax consequences for equity recipients. Different types of equity trigger varying tax events.

- Insight: Consult legal and tax professionals. understand tax implications for founders, employees, and investors.

- Example: An employee exercises stock options without realizing the tax implications, resulting in unexpected tax bills.

6. Neglecting Scenario Modeling:

- Mistake: Failing to model cap table scenarios. What if there's a down round? How does it impact ownership?

- Insight: Use cap table management tools to simulate scenarios. Understand the effects of different funding rounds.

- Example: A startup raises funds at a lower valuation, causing significant dilution. Had they modeled scenarios, they could have prepared better.

7. Not Communicating Changes:

- Mistake: Keeping cap table updates confidential. Shareholders need transparency.

- Insight: Regularly communicate changes—new investors, employee grants, or exits.

- Example: An early investor feels blindsided when they discover dilution after a funding round because the company didn't communicate openly.

In summary, cap table management requires diligence, accuracy, and foresight. By avoiding these common mistakes, startups can maintain a clear and equitable ownership structure, fostering trust among stakeholders. Remember, a well-maintained cap table is a valuable asset for any growing company.

5. Equity Dilution Strategies

Equity dilution is an essential consideration for startup founders, investors, and employees. As a company grows, it often needs to raise capital to fuel expansion, product development, and market penetration. However, this influx of capital comes at a cost: the dilution of existing shareholders' ownership stakes. In this section, we explore various equity dilution strategies, shedding light on their implications and providing actionable insights for startups.

1. convertible Notes and SAFE agreements: Balancing Risk and Reward

- Convertible notes and Simple agreement for Future equity (SAFE) are popular early-stage funding instruments. They allow startups to raise capital without immediately setting a valuation. Investors provide funds in exchange for a promise of future equity when a priced round occurs.

- Advantages:

- Quick and Flexible: convertible notes and safes expedite fundraising by avoiding lengthy valuation negotiations.

- Deferred Valuation: Founders postpone valuation discussions until a later funding round.

- Challenges:

- Dilution Uncertainty: Since the conversion price isn't fixed, existing shareholders face uncertainty about their ownership percentage.

- Interest and Discounts: Convertible notes may accrue interest, and SAFEs often include valuation discounts, affecting dilution.

- Example: Imagine a startup raises $500,000 through a convertible note with a 20% discount. When the next priced round occurs at a $5 million valuation, the investor converts their note at a $4 million valuation, effectively receiving more equity than if they had invested directly at the $5 million valuation.

2. Employee Stock Options (ESOs): Aligning Interests

- ESOs grant employees the right to purchase company shares at a predetermined price (the exercise price) within a specified timeframe.

- Advantages:

- Motivation: ESOs align employee interests with company success.

- Retention: Employees stay committed to the company, knowing their efforts impact their own equity value.

- Challenges:

- Dilution: As employees exercise options, new shares are issued, diluting existing shareholders.

- Valuation Risk: If the company's valuation drops, ESOs lose value.

- Example: A software engineer receives 10,000 ESOs with an exercise price of $5 per share. If the company goes public at $20 per share, they can buy shares worth $150,000 for just $50,000.

3. Anti-Dilution Provisions: Protecting Early Investors

- anti-dilution clauses adjust early investors' ownership if subsequent funding rounds occur at a lower valuation.

- Full Ratchet vs. Weighted Average:

- Full Ratchet: Converts early investors' shares to the new lower price.

- Weighted Average: Adjusts the conversion price based on the new valuation and the amount raised.

- Example: An angel investor with a full-ratchet anti-dilution provision invests at $10 per share. If a later round occurs at $5 per share, their shares convert to the new price, minimizing dilution.

4. Secondary sales and Liquidity events: Managing Employee Equity

- Secondary sales allow employees to sell vested shares before an IPO or acquisition.

- Advantages:

- Employee Liquidity: Employees can realize value without waiting for an exit event.

- Retention: Providing liquidity can enhance employee satisfaction.

- Challenges:

- Timing: Secondary sales must align with company policies and market conditions.

- Dilution: Existing shareholders may face dilution if employees sell significant portions of their holdings.

- Example: A senior executive sells a portion of their vested shares to cover a down payment on a house, benefiting from the company's success.

In summary, equity dilution is inevitable for growing startups. By understanding these strategies and their trade-offs, founders and investors can make informed decisions that balance growth with maintaining a fair ownership structure. Remember that dilution isn't inherently negative—it's a necessary step toward achieving ambitious goals.

6. Transparency and Communication

Transparency and effective communication are cornerstones of successful cap table management for startups. In this section, we delve into the nuances of how transparency and communication play pivotal roles in maintaining a healthy cap table. By fostering openness and clarity, startups can navigate the complexities of equity ownership, investor relations, and decision-making more effectively.

1. Clear Ownership Structure:

- Transparency begins with a well-defined ownership structure. Startups should maintain accurate records of equity ownership, including details about founders, employees, and investors. A clear cap table provides visibility into who holds what percentage of the company.

- Example: Imagine a startup where the founders hold 60% of the equity, early employees collectively own 20%, and angel investors have the remaining 20%. This breakdown ensures everyone understands their stake and potential dilution.

2. Regular Updates and Reporting:

- Regularly updating the cap table is essential. Founders should communicate changes promptly, whether due to new funding rounds, employee stock options, or convertible notes converting into equity.

- Example: After a successful Series A funding, the cap table should reflect the new investor's ownership. Timely communication ensures alignment among stakeholders.

3. Investor Relations:

- Transparent communication with investors fosters trust. Investors appreciate updates on company progress, financials, and major decisions.

- Example: When pivoting the business model, founders should engage with investors early, explaining the rationale and seeking feedback. Transparency minimizes surprises and builds stronger relationships.

4. Scenario modeling and Sensitivity analysis:

- Startups should conduct scenario modeling to assess the impact of various events (e.g., additional funding, employee stock grants, exits) on the cap table.

- Example: By running sensitivity analyses, founders can anticipate dilution effects and make informed decisions. Transparently sharing these models with stakeholders ensures alignment.

5. Communication During Fundraising Rounds:

- During fundraising, startups must communicate transparently with potential investors. Sharing the cap table, capitalization history, and growth projections demonstrates professionalism.

- Example: A startup seeking Series B funding should provide detailed cap table information to venture capitalists, highlighting growth metrics and exit potential.

6. Employee Equity Education:

- Transparently educating employees about equity grants is crucial. Employees should understand vesting schedules, exercise windows, and tax implications.

- Example: Hosting workshops or webinars on equity basics helps employees grasp their ownership rights and responsibilities.

7. Exit Scenarios and Liquidity Events:

- Transparently discussing exit scenarios prepares stakeholders for potential liquidity events (e.g., IPOs, acquisitions).

- Example: Founders should communicate the company's exit strategy, keeping investors informed about progress toward that goal.

In summary, transparency and effective communication create a shared understanding of ownership, foster trust, and empower startups to make informed decisions. By embracing these practices, startups can navigate cap table complexities with confidence. Remember, transparency isn't just about numbers; it's about building a culture of openness and collaboration.

7. Leveraging Technology for Cap Table Management

1. Automation and Accuracy:

- Nuance: Traditional cap table management involved manual data entry, which was prone to errors and time-consuming.

- Insight: Modern cap table management platforms automate data collection, calculations, and updates. These tools integrate with other financial systems, such as accounting software and investor relations platforms.

- Example: Imagine a startup issuing new stock options to employees. With technology, these grants are automatically reflected in the cap table, ensuring accuracy and reducing administrative overhead.

2. Scenario Modeling and Sensitivity Analysis:

- Nuance: Startups often face complex scenarios, such as fundraising rounds, stock splits, or employee exits.

- Insight: cap table software allows scenario modeling, enabling founders and CFOs to simulate the impact of various events on ownership percentages and dilution.

- Example: Suppose a startup plans to raise a Series A round. By inputting the investment terms, the cap table tool can project the post-money valuation and show how it affects existing shareholders.

3. Equity Vesting and Expiration Tracking:

- Nuance: Equity grants typically vest over time, subject to specific conditions.

- Insight: Cap table platforms track vesting schedules, ensuring compliance with agreements and preventing surprises.

- Example: An employee's stock options vest over four years with a one-year cliff. The technology alerts HR and finance teams when vesting milestones are reached.

4. investor Relations and transparency:

- Nuance: Investors, both current and potential, seek transparency into a company's ownership structure.

- Insight: Cap table software provides secure portals for investors to view their holdings, understand dilution, and access relevant documents.

- Example: During due diligence for a funding round, investors can log in to the platform and review the cap table, eliminating the need for manual data sharing.

5. Compliance and Reporting:

- Nuance: Regulatory compliance (e.g., SEC filings) requires accurate cap table data.

- Insight: Technology streamlines compliance by generating reports, calculating ownership percentages, and tracking changes.

- Example: When filing an annual report, the CFO can export a detailed cap table report directly from the software, saving time and minimizing errors.

6. Integration with Legal and Accounting Systems:

- Nuance: Cap table management intersects with legal and accounting processes.

- Insight: Modern tools integrate seamlessly with legal databases and accounting software, ensuring consistency across systems.

- Example: When closing a financing round, the legal team can pull data directly from the cap table software to draft investment agreements.

In summary, leveraging technology for cap table management empowers startups to maintain accurate records, make informed decisions, and foster trust among stakeholders. Whether you're a founder, investor, or CFO, embracing these tools enhances efficiency and enables strategic planning. Remember that while technology simplifies the process, understanding the underlying principles remains crucial.

8. Cap Table Maintenance During Funding Rounds

1. Transparency and Communication:

- Nuance: Transparency is the bedrock of effective cap table management. Founders, investors, and employees should have a clear understanding of equity ownership.

- Insight: Regularly communicate with stakeholders about any changes to the cap table. Transparency builds trust and ensures everyone is aligned.

- Example: Imagine a startup that just closed a seed funding round. The founders should promptly update the cap table to reflect the new investors' ownership percentages. They might use cap table management software to share real-time updates with all stakeholders.

2. Scenario Modeling and Sensitivity Analysis:

- Nuance: Cap tables are dynamic. They change with each funding round, employee stock grants, and convertible note conversions.

- Insight: Use scenario modeling to anticipate the impact of different funding scenarios. Sensitivity analysis helps assess how changes (e.g., valuation adjustments, option pool expansions) affect ownership.

- Example: Suppose a Series A round is imminent. The CFO can model scenarios: "What if we raise $5 million at a $20 million pre-money valuation?" or "How does employee stock option exercise impact founder ownership?"

3. option Pool management:

- Nuance: Startups often allocate a portion of equity for employee stock options. Managing the option pool is essential.

- Insight: Reserve enough shares for future hires and promotions. Balance dilution concerns with attracting top talent.

- Example: A tech startup plans to hire engineers. They allocate 15% of the company's equity for the option pool. As they hire, they update the cap table to reflect new option grants.

4. Convertible Securities and Anti-Dilution Provisions:

- Nuance: Convertible notes, SAFE agreements, and other debt instruments can convert into equity during subsequent funding rounds.

- Insight: Understand anti-dilution provisions. Weighted average and full ratchet mechanisms impact existing shareholders.

- Example: An angel investor holds convertible notes. When the Series B round occurs, the cap table adjusts based on the conversion terms agreed upon earlier.

5. Founder Vesting and Acceleration:

- Nuance: Founders' equity should vest over time. Acceleration clauses protect founders in case of an acquisition or termination.

- Insight: Vesting schedules prevent premature exits. Acceleration ensures founders receive their fair share.

- Example: Co-founders agree to a 4-year vesting period with a 1-year cliff. If one founder leaves after 2 years, they retain 50% of their equity.

6. Post-Investment Compliance:

- Nuance: After closing a funding round, comply with legal requirements (e.g., filing Form D with the SEC in the U.S.).

- Insight: Failure to comply can lead to penalties or legal disputes.

- Example: A startup raises a series Seed round. The CFO ensures timely filings and updates the cap table accordingly.

In summary, cap table maintenance during funding rounds demands diligence, collaboration, and foresight. By following these best practices, startups can navigate the complexities of ownership, attract investors, and set themselves up for long-term success. Remember, the cap table isn't just a spreadsheet; it's a reflection of your company's journey and the people who believe in its vision.

9. Exit Scenarios and Cap Table Impact

1. IPO (Initial Public Offering):

- An IPO is a significant milestone for startups. When a company goes public, it issues shares to the public through stock exchanges. Existing shareholders, including founders, employees, and early investors, can sell their shares.

- cap table impact:

- Dilution: The issuance of new shares during an IPO dilutes existing shareholders' ownership. Founders and employees may see their ownership percentages decrease.

- Liquidity: An IPO provides liquidity to shareholders. employees with stock options can exercise and sell their shares.

- Example: Imagine a startup with 10 million outstanding shares. After an IPO, it issues 2 million new shares. Founders' ownership decreases from 40% to 30%, but they gain liquidity.

2. Acquisition:

- Startups may be acquired by larger companies. The acquiring company pays a purchase price, often a mix of cash and stock.

- Cap table impact:

- Cash vs. Stock: Acquisitions can be all-cash or involve stock swaps. Stock swaps affect ownership percentages.

- Earnouts: Earnouts are additional payments based on performance milestones. They impact the cap table post-acquisition.

- Example: Startup X is acquired by BigCo. Founders receive $10 million in cash and 100,000 shares of BigCo stock. Their cap table impact depends on BigCo's stock price.

3. Secondary Sales:

- Secondary sales allow existing shareholders to sell their shares before an IPO or acquisition.

- Cap table impact:

- Liquidity: Employees and early investors can monetize their equity.

- Dilution: New investors may buy shares, diluting existing shareholders.

- Example: Startup Y facilitates a secondary sale. Employees exercise options and sell shares to external investors, balancing liquidity and dilution.

4. Liquidation Preferences:

- Preferred shareholders (e.g., venture capitalists) often have liquidation preferences. They get paid first during an exit.

- Cap table impact:

- Common Shareholders: Liquidation preferences reduce the amount available for common shareholders.

- exit valuation: The exit valuation determines how much each shareholder receives.

- Example: If Startup Z is acquired for $50 million, preferred shareholders get their liquidation preference first, affecting common shareholders' payouts.

5. Employee Equity Pools:

- Employee stock option pools are crucial for attracting talent. They impact the cap table.

- Cap table impact:

- Dilution: As employees exercise options, new shares are issued, diluting existing shareholders.

- Hiring: A well-sized equity pool ensures startups can hire and retain top talent.

- Example: Startup A allocates 15% of its equity for employee stock options. As employees join, the pool gets utilized.

6. Founder vesting and Lockup periods:

- Founders often have vesting schedules. Lockup periods prevent them from selling immediately after an IPO.

- Cap table impact:

- Stability: Lockup periods stabilize the stock price post-IPO.

- Alignment: Vesting aligns founders' interests with the company's long-term success.

- Example: Founder B's shares vest over four years. After the IPO, they can't sell for six months due to lockup.

In summary, exit scenarios significantly impact a startup's cap table. Founders, investors, and employees should consider these factors when making strategic decisions. By understanding the nuances, they can navigate the complexities of equity ownership effectively.

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