Startup Blabber #005: The Cap Table

Hey all,

Before I talk about today's topic, I wanted to say that today is a pretty sad day for me. I've always been a pretty big fan of the Houston Rockets (a NBA team). They played a really good conference final series against the Golden State Warriors. I don't think they went out the way they wanted to, but I really had a great year watching them play, having CP3 mesh well with Harden, as well as the huge supporting cast, they were stellar. Chris Paul may be sh**ting in his pants right now, unable to play the latter games of the series, but we all knew that coming into the playoffs, that he was prone to injury. It would be pretty cool to re-sign Paul and Capela and have another go at it next year. I think with a few more younger additions, this team could be great!

Will that happen? I'm not sure. If we take a look at the current yearly salary courtesy of www.spotrac.com, we get the following:

As you can see, the Houston Rockets team can definitely be completely different next year round, with so many free agents this offseason. If Paul is willing to take a slight salary cut and resign the core of Ariza and Capela, while resigning their strong second unit man in Green, and potentially Joe Johnson, it could still be a formidable team next year. There is still the sad realization that the NBA teams overestimated the future revenue, and overpaid players based off of that assumption (were too convinced that the Warrior dominance would bring in a ton of extra cash), like they did with Ryno (Ryan Anderson).

Anyways ...

Seguing into today's topic (which is vaguely reminiscent of the roster's payroll), I am going to talk about the Capitalization Table (Cap Table), which is basically a record of the shareholders and their respective ownership of the company. This is actually a very important discussion to be had before starting any company.

Quick Recap of Startup Blabber #004: The Hamptons Five
In the previous article on startups, I talked about the different types of founding teams out there, The King and The Coalition. The King was to have a very strong leader and have a great middle management to execute the company plans. The Coalition was to have a less risky, but slower executionary, strong top management. Whatever position you might take, be very clear to your founding teammates from the get go and put everything on pen and paper. I have seem so many startups go down the drain from empty verbal promises.

Whichever strategy you choose, when you have a co-founder, you might opt to go the "lets split down the middle" strategy for company shares. For one, in the beginning, no one really thinks about the company's future, except that it will be "awesome". This is probably the worst decision to ever make in the beginning. With equal shares of the company, a startup will never really get anything done. It is very crucial to have a clear leader in the company. While this may go against The Coalition, I don't really think it does. You can have a clear leader and a group of top management at the same time.

Allocating the Distribution
In the beginning, you will have to allocate shares to your cofounders. If you are the leader, you shouldn't hoard the shares, but it is important to have a clear majority, just in case there is an impasse in the discussion between the co-founders. I think there are two different types of people in which shares are given.

1. Early team members risking their full time and energy for the company and/or co-founders.
2. Later-stage management leaders.

As for the first category, it is also divided between two different types of people: 1) co-founders; and 2) early employees. Co-founder shares are the hardest to delegate, since much of the distribution is not based on scientific math. You look at the history of the co-founder, their skill sets, and just set a number. As much as I want to say there is a number to keep in mind, in practicality, I've never been able to resort to scientific numbers. Just keep in mind the rule that if you are the leader, you need the most shares. I tend to go with "the leader gets 60% and the rest of the co-founders are split equally with the other 40%". This would apply when there are more than 2 people. If two, you guys can just figure it out. For the co-founders that get a share, they cannot be working part-time. It will take everything you got to get this company to succeed, and you, and everyone else on the team will have to contribute 110%.

As for the early employees, they are basically giving up their existing future to come and work for you. I like to compensate these people with shares of the company. I tend to go about it by seeing what their current salary is, reducing it slightly in terms of monetary compensation, and adding about a year's worth of compensation in stock options/grants according to the seed investment valuation estimate. Again, this is not fixed math, and usually resorts to some sort of negotiation in the beginning.

As for the late stage management leaders, it is much easier. You have probably gotten some sort of investment by now to further the growth of the company. A lot of the growth has been an outcome of the blood and sweat that everyone has put in. You are at a point where to further more growth, you will need the expertise of veterans. You know the veteran's previous salary and you know how much your company is worth. Basically, you will have to agree on a total compensation package and divide it between salary and stock compensation.

Whether it is a co-founder, an early employee, or a later-stage employee, if the nation's law permit, I would also recommend implementing a vesting schedule. This protects the company in case any person abruptly leaves before the company can fully follow through with its plans.

Hope this helps get stuff started and good luck to all of the entrepreneurs out there getting started!

Have a great day,
Chris

More about myself:
Steemit Introductory Post

Startup Blabber Series:
Startup Blabber #001: Communication Within a Team
Startup Blabber #002: Most Important Aspect of a Startup
Startup Blabber #003: There shall always be conflict!
Startup Blabber #004: The Hamptons Five

Althea Talk Series:
Althea Talk #001: Introduction
Althea Talk #002: My Journey Into Skincare