Cap Table Training Combined Handouts

Copyright 2012 Greater Des Moines Partnership
Capitalization Tables Due

Diligence Training
Drew Larson BrownWinick larson@brownwinick.com
Joe Leo BrownWinick leo@brownwinick.com
J.D. Geneser LWBJ Capital Advisors jd@lwbj.com
Dave Watson LWBJ Capital Advisors dwatson@lwbj.com
Welcome
Sign in?
Phones on silent?
Where are the bathrooms?
Introductions
Thank You Sponsors!
Agenda & Goal
Agenda:
Present 5 rounds of capitalization for a fictitious
company (LWBJ will represent the investors,
BrownWinick will represent the company)
Demonstrate the basics of the cap table
Goal:
For you to leave feeling like you have a solid
understanding of a basic cap table
The Company: Perfect Bale
Founders Funding
Formation Founder Funding
Three founders of Perfect Bale Aaron, Bill, and Chris.
Each contributes $20,000 to form the company, as well as their
intellectual property related to the idea. Each is issued 200,000
shares of common stock ($0.10 per share).
The initial capital is expected to pay for initial prototype
development and testing.
They work with a lawyer to create initial organizational
documents and to issue the three stock certificates.
Founders Funding
Round One
Friends and Family Round
Its been three months since Perfect Bale was formed.
Due to unexpected costs in developing the prototype, the initial capital was
only enough to complete rough design work and build a prototype of the
insertion hardware.
Perfect Tag also realized that to make the edible tags, they required more
specialized scientific and engineering knowledge regarding chemistry and
nutrition testing. This will require additional capital.
Perfect Bale desires to raise $200,000 from their friends and family to
complete the development of the prototypes and to engage someone with
the proper scientific and engineering knowledge to complete the edible tags.
Perfect Bale also desires to file a patent application on the technology.
To raise the money, Perfect Bale offers common shares at $2.00 per share.
They manage to convince Aarons wealthy Aunt Doreen to fund the entire
amount.
Round One
Round Two
Engaging Expert
With their new $200,000, Perfect Bale is ready to engage the
scientific/engineering expert necessary to complete the development of the
edible tag.
They have decided to engage Dr. Ellen, a chemical engineer at Iowa State
University, to assist in developing the edible tags and to test those tags to
ensure that they are safe for animal consumption.
Dr. Ellen believes in Perfect Bales technology and is willing to work for a
reduced hourly rate in exchange for some sort of equity interest in Perfect
Bale. Perfect Bale desires to accept this proposal to make their cash last
longer.
Perfect Bale offers Dr. Ellen non-qualified stock options for 36,842 common
shares at a price of $2.00 per share, subject to certain vesting requirements
and acceleration upon merger or acquisition.
Round Two
Round Three
Series A - Plains Angels Round
It has been six months since Perfect Bale engaged Dr. Ellen, and it now has working
prototypes of all of its products and is ready to commercialize and scale production.
It has received a commitment from one major ag implement dealer in the Midwest to
sell Perfect Bales products, and has already made some initial sales to some early
adopters.
As part of the commercialization, Aaron, Bill, and Chris will all start working for Perfect
Bale full time.
To scale, Perfect Bale believes it will need $1,750,000. This will cover officer salaries,
marketing and travel expenses, production expenses, and other working capital. It is
expected to provide 12 months of initial runway.
Perfect Bale is offering 175,000 shares of common stock for $1,750,000 ($10 per share).
Between Plains Angels and other angel investors, Perfect Bale is able to fully subscribe
the Plains Angel round.
Round Three
Round Four
Series B Down Round
In the twelve (12) months following the Plains Angels round, Perfect Bale was able to
commercialize the product. However, a number of circumstances slowed the companys
growth and caused the initial marketing to be substantially more expensive than
expected. These circumstances included the following:
Due to drought, the cost of the inputs for the edible tags increased by 50%, greatly decreasing
Perfect Bales margins on the consumable products that it was relying on to finance continued
growth.
Adoption of Perfect Bales products has been slower than hoped. In addition, desired support
from trade associations has been slow to materialize.
Due to high input costs, livestock herds had been significantly reduced in size, which reduced
the total demand for hay.
Perfect Bale continues to believe in the value of its products. However, it will need
additional capital to help it overcome the problems described above and provide more
runway to build up sales to a self-supporting level.
With the decreased margins caused by the higher input costs, the value of the company
looks significantly lower than during the Plains Angels round.
To continue to operate, Perfect Bale decides to raise an additional $1,000,000 at $5.00
per common share (200,000 common shares), which is fully subscribed by the Series A
Investors.
Round Four
Round Five
Series C Round
Perfect Bale was able to find investors for the Series B round and was able to survive the
difficult economic conditions, and are now another twelve (12) months down the road. The
company's operations now provide positive cash flow.
Up until now, Perfect Bale has focused all of its sales and marketing efforts in the North
American market. With the confidence from its North American success, it has researched
expanding into international markets, particular South America where there is significant
growth in the agriculture and livestock industries.
To effectively expand into South America, Perfect Bale believes it will require $5,000,000 in
capital. This will finance building a distribution network, a South American production facility,
legal and financial services, regulatory assistance, and similar activities.
Perfect Bale has negotiated with Ag Venture Fund ("AVF"), a venture capital firm that focuses
on agricultural products and technology, to finance the expansion.
AVF desires to receive preferred shares instead of common shares. AVF is demanding the
following rights:
The preferred shares would have receive a cumulative, non-compounding dividend of 10%.
Perfect Bale will provide AVF with warrant coverage equal to 30% of the Series C investment.
The preferred shares will have a liquidation preference (including any shares received from the
exercise of any warrants).
AVF will have piggyback (as opposed to demand) registration rights for the preferred shares.
AVF will have drag along rights. Perfect Bale decided to negotiate for tag along rights for the common
shareholders in response.
Round Five
Sale of Company
Sale of the Company
After receiving the Series C capital, Perfect Bale successfully
launched its product in South America. Thereafter, it started
selling into Australia, Europe, and other promising markets.
For two years, Perfect Bale was very successful and had
extremely rapid growth. However, in the third year sales growth
started to slow as high growth potential markets became more
limited. In year three, the EBITDA for Perfect Bale is
approximately $5M per year.
At the end of year three, a larger agricultural conglomerate
offers to purchase Perfect Bale for $17.5M, or 3.5x EBITDA.
After significant reflection, the board of directors decided to
recommend approval of the sale to the shareholders, and the
shareholders thereafter approved the sale.
Sale of Company
Summary
Key Points
Questions?
Thank You!

April - 2012

URL: www.PlainsAngels.com

Contact Information:
Mike Colwell
mike@plainsangels.com

Finmodel4 Example:
Perfect Bale

Industry:
Agriculture Technology

Business Summary:

Perfect Bale delivers a complete solution to managing hay
bale information and health. We focus on the large bale
market (1000lb or larger) and provide a system of hardware,
software and unique edible tags that allow the identification,
tracking and health of the hay bale from the time of baling to
the point of feeding. The principals have many years of
market and technology knowledge.
Customer Problem:

Baled hay is a very valuable commodity facing a number of
ongoing challenges. Selling or buying hay in the open market
is fraught with challenges. For the seller, receiving top dollar
for a quality product can be challenging with no real objective
measure of hay quality and health. For the buyer, knowing if
what you are receiving is what you really need remains a key
challenge. Those raising organic beef need to know if the hay
was grown with fertilizer. Mold, heavy metals, rot, carcasses
are among other key issues with purchased hay.
Product/Services:
Perfect Bale provides a hardware software solution to insert a
revolutionary edible tag into the bale during the baling
process. This tag is buried deep in the bale and is impossible
to find without unrolling the bale. A second, identical tag is
attached to the outside of the bale. Both tags indicate the
date, time, location, and moisture content of the bale. The
tags indicates further information including detection of mold,
rot, carcasses, along with max heat and max moisture. The
insertion hardware attaches to most major manufacturers
large baling systems.
Along with the insertion system Perfect Bale also provides an
application for an iPhone or Android phone that can read the
tag information by taking a picture of the tag and then
reading the information which looks to a human like a large
set of barcodes. A cloud based tracking application allows for
tracking of location for each bale from harvest to use. Each
time a tag is scanned, the information is updated on a map /
database available to all producers and consumers of hay.
Target Market/Customers:

Our target market is growers of Hay and other baled
consumables. We will target these growers first through third
party sales agents and transporters of hay. We will also
promote the products to consumers of large bale hay to build
demand for the tagging systems.
Sales/Marketing Strategy:

We will work with the equipment reseller market focused on
balers to promote sell, install and support our products. We
will make the consumable tags available through the reseller
channel. We will actively promote our products at appropriate
trade shoes including the farm progress show, various state
and key county fairs and trade shows for agricultural dealers.
We will participate in hay auctions to promote the price and
quality differences of Perfect Bale marked product.
Business Model:

Our model is to sell all of our product and services, other than
the phone applications, through the agricultural equipment
dealer network. We will sell these at lower margins to more
readily enable the sales of the tag stock consumables. We
anticipate a 60% margin on tags to the dealer and have left
significant margin available for the dealer upon final sale.
Our final price on a tag will be in the $1 range. This
represents 1% or less of the value of a large hay bale.
Competitors:

There are no direct competitors to this system as there are
not any companies offering health or location based tagging
systems for hay bales. We feel our main competition will be
price perception and
Competitive Advantages:
Unique fully edible tag
Simple application system adds directly to the baler
Utilize the existing equipment dealer channel
Theft, health and quality control
Tracking over time for key problem areas such as
mold, rot and temperature.
Perfect Bale
Proforma Cap Table
Full Diluted Basis
Founders
Investment $ Shares % of Total
Founders
Aaron 20,000 200,000 33.33%
Bill 20,000 200,000 33.33%
Chris 20,000 200,000 33.33%
Total 60,000 600,000 100%
Perfect Bale
Proforma Cap Table
Full Diluted Basis
Founders Round 1
Pre Money Investment at
Investment Shares % of Total Value 2.00 $ Shares % of Total Value
Founders
Aaron 20,000 200,000 33.33% 200,000 28.57% 400,000 $
Bill 20,000 200,000 33.33% 200,000 28.57% 400,000 $
Chris 20,000 200,000 33.33% 200,000 28.57% 400,000 $
Round 1
Doreen 200,000 100,000 14.29% 200,000 $
Total 60,000 600,000 100% 1,200,000 200,000 700,000 100% 1,400,000 $
Value 1,200,000 $ 1,400,000 $
Shares 600,000 700,000 $
Price/Share 2.00 2.00
Perfect Bale
Proforma Cap Table
Full Diluted Basis
Founders Round 1
Pre Money Investment at
Investment $ Shares % of Total Value 2.00 $ Shares % of Total Value
Founders
Aaron 20,000 200,000 33.33% 200,000 27.14% 400,000 $
Bill 20,000 200,000 33.33% 200,000 27.14% 400,000 $
Chris 20,000 200,000 33.33% 200,000 27.14% 400,000 $
Round 1
Doreen 200,000 100,000 13.57% 200,000 $
Options 36,842 5.00% 73,684 $
Total 60,000 600,000 100% 1,200,000 200,000 736,842 100% 1,473,684 $
Value 1,200,000 $ 1,400,000 $
Shares 600,000 736,842 $
Price/Share 2.00
Perfect Bale
Proforma Cap Table
Full Diluted Basis
Founders Round 1 Series A
Pre Money Investment at Pre Money
Investment
at
Investment
$ Shares
% of
Total Value 2.00 $ Shares
% of
Total Value 10 $ Shares % of Total Value
Founders
Aaron 20,000 200,000 33.33% 200,000 27.14% 200,000 21.93% 2,016,161.57 $
Bill 20,000 200,000 33.33% 200,000 27.14% 200,000 21.93% 2,016,161.57 $
Chris 20,000 200,000 33.33% 200,000 27.14% 200,000 21.93% 2,016,161.57 $
Round 1
Doreen 200,000 100,000 13.57% 100,000 10.97% 1,008,080.79 $
Seires A
Plains Angels 1,750,000 175,000 19.19% 1,764,141.38 $
Options 36,842 5.00% 36,842 4.04% 371,397.12 $
Total 60,000 600,000 100% 1,200,000 200,000 736,842 100% 7,368,420 1,750,000 911,842 100% 9,192,104.00 $
Value 1,200,000 $ 1,400,000 $ 7,368,420 $ 9,118,420 $
Shares 600,000 736,842 $ 736,842 911,842 $
Price/Share 2.00 10.00 10.00
Perfect Bale
Proforma Cap Table
Fully Diluted Basis
Founders Round 1 Series A Series B
Pre Money
Investment
at Pre Money
Investment
at Pre Money
Investment
at
Investment
$ Shares
% of
Total Value 2.00 $ Shares % of Total Value 10.00 $ Shares
% of
% of
Total Value
Founders
Aaron 20,000 200,000 33.33% 200,000 27.14% 200,000 21.93% 200,000 17.99% 1,013,254.40 $
Bill 20,000 200,000 33.33% 200,000 27.14% 200,000 21.93% 200,000 17.99% 1,013,254.40 $
Chris 20,000 200,000 33.33% 200,000 27.14% 200,000 21.93% 200,000 17.99% 1,013,254.40 $
Round 1
Doreen 200,000 100,000 13.57% 100,000 10.97% 100,000 8.99% 506,627.20 $
Seires A
Plains Angels 1,750,000 175,000 19.19% 175,000 15.74% 886,597.60 $
Seires B
Investor 1,000,000 200,000 17.99% 1,013,254.40 $
Options 36,842 5.00% 36,842 4.04% 36,842 3.31% 186,651.59 $
Total 60,000 600,000 100% 1,200,000 200,000 736,842 100% 7,368,420 1,750,000 911,842 100% 4,559,210 1,000,000 1,111,842 100% 5,632,894.00 $
Value 1,200,000 $ 1,400,000 $ 7,368,420 $ 9,118,420 $ 4,559,210 $ 5,559,210 $
Shares 600,000 736,842 $ 736,842 911,842 $ 911,842 1,111,842 $
Price/Share 2.00 10.00 10.00 5.00 5.00
Perfect Bale
Proforma Cap Table
Fully Diluted Basis
Founders Round 1 Series A Series B Series C
Pre Money
Investment
at Pre Money
Investment
at Pre Money
Investment
at Pre Money Investment at
Investment
$ Shares
% of
% of
% of
% of
% of
Total Value
Founders
Aaron 20,000 200,000 33.33% 200,000 27.14% 200,000 21.93% 200,000 17.99% 200,000 9.64% 1,356,627.18
Bill 20,000 200,000 33.33% 200,000 27.14% 200,000 21.93% 200,000 17.99% 200,000 9.64% 1,356,627.18
Chris 20,000 200,000 33.33% 200,000 27.14% 200,000 21.93% 200,000 17.99% 200,000 9.64% 1,356,627.18
Round 1
Doreen 200,000 100,000 13.57% 100,000 10.97% 100,000 8.99% 100,000 4.82% 678,313.59
Series A
Plains Angels 1,750,000 175,000 19.19% 175,000 15.74% 175,000 8.43% 1,187,048.78
Series B
Investor 1,000,000 200,000 17.99% 200,000 9.64% 1,356,627.18
Series C
AVF 5,000,000 740,741 35.70% 5,024,545.10
Options 36,842 5.00% 36,842 4.04% 36,842 3.31% 36,842 1.78% 249,904.29
Warrants 222,222 10.71% 1,507,363.53
Total 60,000 600,000 100% 1,200,000 200,000 736,842 100% 7,368,420 1,750,000 911,842 100% 4,559,210 1,000,000 1,111,842 100% 7,500,000 5,000,000 2,074,805 100% 14,073,684.00
Value 1,200,000 $ 1,400,000 $ 7,368,420 $ 9,118,420 $ 4,559,210 $ 5,559,210 $ 7,500,000 $ 12,500,000 $
Shares 600,000 736,842 $ 736,842 911,842 $ 911,842 1,111,842 $ 1,111,842 2,074,805 $
Price/Share 2.00 10.00 10.00 5.00 5.00 6.75 6.02
Warrants 5,000,000 30%
1,500,000 6.75 222,222
Perfect Bale
Proforma Cap Table
Fully Diluted Basis
Sale of Company Sale at $8,000,000
Sale at $17,500,000 Sale at $8,000,000
At Face Sales Proceeds 17,500,000 Sales Proceeds 8,000,000
Shares % of Total Value Options Proceeds 73,684 Shares % of Total Options Proceeds 73,684
Founders Warrants Proceeds 1,500,000 Warrants Proceeds 0
Aaron 200,000 9.64% $1,686,906 200,000 10.80%
Bill 200,000 9.64% $1,686,906 Total Available 19,073,684 200,000 10.80% Total Available 8,073,684
Chris 200,000 9.64% $1,686,906 200,000 10.80%
Round 1 Series C: Series C:
Doreen 100,000 4.82% $843,453 Preferred Dividends 1,500,000 100,000 5.40% Preferred Dividends 1,500,000
Units 6,809,630 Units 5,000,000
Series A Warrants 2,042,889 Warrants 0
Plains Angels 175,000 8.43% $1,476,042 Total to Series C 10,352,519 175,000 9.45% Total to Series C 6,500,000
Series B
Investor 200,000 9.64% $1,686,906 Founders: 200,000 10.80% Founders:
Aaron 1,568,778 Aaron 283,077
Series C Bill 1,568,778 Bill 283,077
AVF 740,741 35.70% $6,247,798 Chris 1,568,778 740,741 39.98% Chris 283,077
Doreen 784,389 Doreen 141,538
Plains Angels 1,372,680 Plains Angels 247,692
Investor 1,568,778 Investor 283,077
Options 36,842 1.78% $310,745 36,842 1.99%
Warrants 222,222 10.71% $1,874,339 Key Employee 288,985 0 0.00% Key Employee 52,146
Total 2,074,805 100.00% $17,500,000 Total 19,073,684 1,852,583 100.00% Total 8,073,684
Value / Share
4.35806932
Scenarios for Cap Table and Dilution Discussion.

The scenarios below are to be read together with the Perfect Bale financial model
example available on the Plains Angels site.

1. Formation Founder Funding

Three founders of Perfect Bale Aaron, Bill, and Chris.
Each contributes $20,000 to form the company, as well as their intellectual property
related to the idea. Each is issued 200,000 shares of common stock ($0.10 per share).
The initial capital is expected to pay for initial prototype development and testing.
They work with a lawyer to create initial organizational documents and to issue the three
stock certificates.

2. Friends and Family Round

Its been three months since Perfect Bale was formed.
Due to unexpected costs in developing the prototype, the initial capital was only enough
to complete rough design work and build a prototype of the insertion hardware.
Perfect Tag also realized that to make the edible tags, they required more specialized
scientific and engineering knowledge regarding chemistry and nutrition testing. This will
require additional capital.
Perfect Bale desires to raise $200,000 from their friends and family to complete the
development of the prototypes and to engage someone with the proper scientific and
engineering knowledge to complete the edible tags.
Perfect Bale also desires to file a patent application on the technology.
To raise the money, Perfect Bale offers common shares at $2.00 per share. They manage
to convince Aarons wealthy Aunt Doreen to fund the entire amount.

3. Engaging Expert

With their new $200,000, Perfect Bale is ready to engage the scientific/engineering
expert necessary to complete the development of the edible tag.
They have decided to engage Dr. Ellen, a chemical engineer at Iowa State University, to
assist in developing the edible tags and to test those tags to ensure that they are safe for
animal consumption.
Dr. Ellen believes in Perfect Bales technology and is willing to work for a reduced
hourly rate in exchange for some sort of equity interest in Perfect Bale. Perfect Bale
desires to accept this proposal to make their cash last longer.
Perfect Bale offers Dr. Ellen non-qualified stock options for 36,842 common shares at a
price of $2.00 per share, subject to certain vesting requirements and acceleration upon
merger or acquisition.

4. Series A - Plains Angels Round

It has been six months since Perfect Bale engaged Dr. Ellen, and it now has working
prototypes of all of its products and is ready to commercialize and scale production.
It has received a commitment from one major ag implement dealer in the Midwest to sell
Perfect Bales products, and has already made some initial sales to some early adopters.
As part of the commercialization, Aaron, Bill, and Chris will all start working for Perfect
Bale full time.
To scale, Perfect Bale believes it will need $1,750,000. This will cover officer salaries,
marketing and travel expenses, production expenses, and other working capital. It is
expected to provide 12 months of initial runway.
Perfect Bale is offering 175,000 shares of common stock for $1,750,000 ($10 per share).
Between Plains Angels and other angel investors, Perfect Bale is able to fully subscribe
the Plains Angel round.

5. Series B Down Round

In the twelve (12) months following the Plains Angels round, Perfect Bale was able to
commercialize the product. However, a number of circumstances slowed the companys
growth and caused the initial marketing to be substantially more expensive than expected.
These circumstances included the following:
o Due to drought, the cost of the inputs for the edible tags increased by 50%, greatly
decreasing Perfect Bales margins on the consumable products that it was relying
on to finance continued growth.
o Adoption of Perfect Bales products has been slower than hoped. In addition,
desired support from trade associations has been slow to materialize.
o Due to high input costs, livestock herds had been significantly reduced in size,
which reduced the total demand for hay.
Perfect Bale continues to believe in the value of its products. However, it will need
additional capital to help it overcome the problems described above and provide more
runway to build up sales to a self-supporting level.
With the decreased margins caused by the higher input costs, the value of the company
looks significantly lower than during the Plains Angels round.
To continue to operate, Perfect Bale decides to raise an additional $1,000,000 at $5.00
per common share (200,000 common shares), which is fully subscribed by the Series A
Investors.

6. Series C Round

Perfect Bale was able to find investors for the Series B round and was able to survive the
difficult economic conditions, and are now another twelve (12) months down the road.
The company's operations now provide positive cash flow.
Up until now, Perfect Bale has focused all of its sales and marketing efforts in the North
American market. With the confidence from its North American success, it has
researched expanding into international markets, particular South America where there is
significant growth in the agriculture and livestock industries.
To effectively expand into South America, Perfect Bale believes it will require
$5,000,000 in capital. This will finance building a distribution network, a South
American production facility, legal and financial services, regulatory assistance, and
similar activities.
Perfect Bale has negotiated with Ag Venture Fund ("AVF"), a venture capital firm that
focuses on agricultural products and technology, to finance the expansion.
AVF desires to receive preferred shares instead of common shares. AVF is demanding
the following rights:
o The preferred shares would have receive a cumulative, non-compounding
dividend of 10%.
o Perfect Bale will provide AVF with warrant coverage equal to 30% of the Series
C investment.
o The preferred shares will have a liquidation preference (including any shares
received from the exercise of any warrants).
o AVF will have piggyback (as opposed to demand) registration rights for the
preferred shares.
o AVF will have drag along rights. Perfect Bale decided to negotiate for tag along
rights for the common shareholders in response.

7. Sale of the Company

After receiving the Series C capital, Perfect Bale successfully launched its product in
South America. Thereafter, it started selling into Australia, Europe, and other promising
markets.
For two years, Perfect Bale was very successful and had extremely rapid growth.
However, in the third year sales growth started to slow as high growth potential markets
became more limited. In year three, the EBITDA for Perfect Bale is approximately $5M
per year.
At the end of year three, a larger agricultural conglomerate offers to purchase Perfect
Bale for $17.5M, or 3.5x EBITDA. After significant reflection, the board of directors
decided to recommend approval of the sale to the shareholders, and the shareholders
thereafter approved the sale.

Post-money Valuation Valuation of a company immediately after a new round of investment, that is,
the pre-money valuation plus the total consideration of the new round of investment.

Pre-money Valuation Valuation of a company agreed-upon by the existing owners and the new
investors, immediately prior to a new round of investment.

Preferred Stock Preferred stock is a contract right, i.e. its terms must be set forth clearly in writing in
order to obtain the anticipated rights. Preferences can be with respect to voting, dividends, and rights on
dissolution.

Ratchet A mechanism by which an investors interest in a company is adjusted based on subsequent
offerings of the companys stock. This is an anti-dilution provision which preserves an investors
percentage interest in a company based on the investors original investment.

Full Ratchet An investor protection provision which specifies that options and convertible
securities may be exercised relative to the lowest price at which securities were issued since the
issuance of the option or convertible security. The full ratchet guarantee prevents dilution, since
the proportionate ownership would stay the same as when the investment was initially made.

Modified Ratchet Only provides for ratcheting in certain limited circumstances as set forth in
an agreement between the investor and the company.

Strike Price The price that will be paid to purchase stock pursuant to a stock option if the option is
exercised.

Tag Along Rights A provision in a companys governing documents which gives minority
stockholders the right to participate on a pro rata basis in any controlling stockholders sale of its stock in
the company to a third party.

Vesting Where the rights that a person has to certain stock accrues over time, such as an employees
right to exercise options as the employees continues employment with the company.

Warrants Securities that give holders the right, but not the obligation, to buy shares of common
stock at a fixed price for a given period of time. Similar to stock options and often offered to investors
as a bonus for cash investment or to service providers in exchange for fees.

Cap Table Due Diligence

1. Do the numbers add up?
- Are all of the shares that the company says are outstanding documented on the
Cap Table?
- Does the total investment amounts match what is expected based on the number
of shares issued?
- Do the percentages of total ownership match the entries in the Cap Table?

2. Does the company have any outstanding options and are they documented on the Cap
Table?

3. Does the companys governing documents authorize all of the classes of stock which
are listed on the Cap Table?

4. Has the company issued more shares of stock than are authorized by the companys
governing documents?

5. Does the companys form of organization permit the classes of stock that are listed on
the companys Cap Table? Applicable to S-corps and certain professional companies.

6. Does the company have minutes which document the approval and issuance of all of
the shares and options which are listed on the Cap Table?

7. Does the company have copies of the share certificates for each of the shares listed on
the Cap Table?

8. Does the companys share register match the information included on the Cap Table?

9. Does the language of the share certificates match the rights of the different classes of
stock as documented on the Capt Table?

10. Are there any shareholder agreements which impact the Cap Table?

11. Are there any anti-dilutive agreements applicable to any of the classes of shares listed
on the Cap Table?

12. Were any shares issued in violation of any shareholder agreements or anti-dilutive
agreements?

13. Does the company have documentation regarding the securities offering exemptions
that were relied on for each round of financing?
GLOSSARY OF TERMS RELATED TO CAP TABLES/DILUTION

Cap Table A table describing the capitalization of a company including the names of all shareholders
and number of shares owned by each shareholder along with the class of stock owned by each
shareholder. This table is often segmented to describe each of several funding rounds in the company.

Common Stock Is the baseline equity of the company which typically has less rights with respect to
dividends, payments on dissolution and voting compared to preferred stock.

Demand Registration Rights A negotiated right of investors to convert private ownership in the
company through registration as shares eligible for trading in public markets.

Dilution The reduction in percentage ownership of the company that investors suffer due to
subsequent funding rounds.

Dividends Proceeds paid by the company as a return on a shareholders investment. Generally, they
are discretionary with the company unless the companys organization documents provide otherwise.
Dividends can be paid either in cash or in kind, i.e. additional shares of stock.
Cumulative Missed dividend payments that continue to accrue.
Non-cumulative Missed dividend payments that do not accrue.
Non-compounding Unpaid dividends are not reinvested for addition shares of common stock.

Down Round A round of financing where the price per share is less than in the previous round of
financing.

Drag Along Rights A provision in a companys governing documents which gives a majority
shareholder wishing to sell to an unrelated third party all or a substantial percentage of its shares in the
company the right to force the other shareholders to also sell all or a portion of their shares to such third
party.

EBITDA Earnings before interest, taxes, depreciation and amortization which is typically used to
analyze profitability of a company.

Friends and Family Round Typically early round of investment by close friends and relatives of the
founders.

Fully Subscribed Where investors have purchased all of the shares that have been offered by the
company in any round of financing.

Liquidation Preference A preference offered to certain investors to receive a greater proportion of
the assets of a company upon its dissolution and liquidation.

Non-qualified Stock Options Stock options that allow a person to purchase stock for a period of
time at or below market price. Non-qualified stock options are not given capital-gains tax treatment.

Option Pool An amount of a companys common stock reserved for future issuances to employees,
directors, advisors, and consultants which typically take the form of stock options.

Piggyback Registrations Rights Providing investors the right to sell stock at the IPO or a later public
offering by adding their shares to the aggregate shares listed in the registration statement.

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