An entrepreneurs’ understanding of capitalization tables (aka “Cap Tables”) is one of the most important things he/she needs to know when beginning to look at raising venture capital (or really any other kind of capital).
As an entrepreneur, you can raise money in two ways (at least legally):
1.) Borrow money from a bank or a friend in the form of debt
2.) Sell a part of your company to an investor in exchange for money
Venture Capital is built around option 2 – selling a part of your company in exchange for money. (In addition to the capital raise, most venture capitalists have strong connections within their respective industries that can help you grow your business.)
StartupMath will be a series of blog posts that focus on the “ins-and-outs” of option 2 from the perspective of me, a VC analyst at Canaan Partners who has seen the good, bad and ugly of cap tables and VC modeling. In the process, I hope to provide transparency into an often misunderstood part of the VC process – the math.