Understanding Jason Lemkins' Cap Table: Pre-money vs Post-money Valuations

In the world of startups, cap tables play a crucial role in determining the ownership stakes and valuation of a company. This article delves into the intricacies of cap tables by focusing on a specific scenario involving Jason Lemkins, a well-known entrepreneur and investor. We will explore why his cap table is structured with a $29M pre-money valuation and how it impacts his ownership stake, particularly in the context of a $3M investment in a Not Too Big Round.

What is a Cap Table?

A cap table, short for capitalization table, is a record of all shareholders in a company, their ownership percentages, and the values of their shares. Cap tables are typically used to manage the equity structure of a company, particularly in startups, where ownership stakes can change frequently due to funding rounds, equity grants, and other financial transactions. The cap table's primary function is to ensure that the equity in the company is allocated accurately based on the investment at different stages.

The Importance of Pre-money and Post-money Valuations

When discussing cap tables, two important terms come into play - pre-money valuation and post-money valuation. The pre-money valuation is the valuation of the company before a new round of funding, while the post-money valuation is the value of the company after the funding round.

Pre-money Valuation

A pre-money valuation, as the name suggests, is the valuation of the company before the new round of funding. In Jason Lemkins' case, the pre-money valuation of his company is set at $29M. This means that all the existing shareholders' equity is calculated based on this amount, and the new round of funding will be layered on top of this valuation.

Post-money Valuation

The post-money valuation is the total value of the company following the new round of funding. If Jason Lemkins' company raises $3M at a $29M pre-money valuation, the post-money valuation would be $32M ($29M $3M). This post-money valuation becomes the new baseline for determining the ownership stakes.

The Mathematics Behind Ownership Stakes

One of the fundamental principles in cap table management is understanding the relationship between the investment amount, the post-money valuation, and the resulting ownership stake. The formula to calculate the new ownership stake after a funding round is as follows:

New Ownership Stake (Investment Amount / Post-money Valuation) * 100

In Jason Lemkins' scenario, the investment amount is $3M, and the post-money valuation is $32M. Plugging these numbers into the formula, we get:

New Ownership Stake ($3M / $32M) * 100 9.375%

This calculation indicates that Jason Lemkins would own approximately 9.375% of the company post-investment, representing his share of the funding round.

Ensuring Minimum Ownership Targets

Entrepreneurs and investors often strive to maintain a certain minimum ownership target. In this case, Jason Lemkins' minimum target ownership is set at 10%. How does the $29M pre-money valuation and the $3M investment in a Not Too Big Round align with this target?

From the mathematics above, we can see that the current ownership stake is 9.375%, which is just below the 10% target. This slight discrepancy is why the pre-money valuation is adjusted to $30M, achieving the desired 10% minimum ownership target. The new post-money valuation would then be $33M ($30M $3M), and the new ownership stake would be:

New Ownership Stake ($3M / $33M) * 100 9.091%

With this adjustment, Jason Lemkins' ownership stake would be 9.091%, which is just short of the 10% target. However, the slight fudging to a $30M pre-money valuation ensures that the target ownership of 10% is maintained. This fudging means that the pre-money valuation is slightly higher, leading to a slightly lower ownership stake post-investment.

Key Takeaways

1. Configuration of Cap Tables: Understanding how the pre-money and post-money valuations are calculated and adjusted is crucial for creating accurate cap tables.

2. Funding Round Calculations: Entrepreneurs and investors can use the ownership stake formula to ensure their desired minimum ownership targets are met.

3. Flexibility in Valuation: Flexing the pre-money valuation slightly can help achieve the desired ownership stake post-investment.

Jason Lemkins' cap table is a real-world example of the complex yet critical process of managing ownership stakes and valuations in early-stage startups. By understanding these nuances, entrepreneurs and investors can make more informed decisions and navigate the intricacies of cap tables with confidence.