Knowing how to create, read and explain a cap table is a must for startups, entrepreneurs and emerging companies. Learn from the SURGE lawyers at Fredrikson & Byron

2. Discussion Leaders
• Patrick Donohue
Financial Strategist
President, Hill Capital Corporation
• Eric Madson
Shareholder
Fredrikson & Byron, P.A.
• Kevin Spreng
Shareholder
Fredrikson & Byron, P.A.
© 2015 Fredrikson & Byron, P.A.

3. Notes of caution
• This presentation is about the capitalization structures of
corporations. It does not specifically address the capitalization
of LLCs or other entities.
• Corporations are governed by the laws of the state in which
they are incorporated and the laws of each state are different,
so while some statements in this presentation may be true for
some or most corporations, they are not necessarily true for all
corporations.
• The statements in this presentation are general in nature but
there are almost always exceptions to the rules.
• References to “Charter” means either the corporation’s Articles
of Incorporation (MN) or Certificate of Incorporation (DE).
© 2015 Fredrikson & Byron, P.A.

4. What is stock?
• A share represents a fractional ownership interest in a
company.
• Shares can be different classes (common or preferred)
and series (e.g., Series A Preferred Stock, Series B
Preferred Stock, etc.).
• Each series is a sub-set of a class (e.g., Series A
Preferred Stock is part of the Preferred Stock class).
• In addition, companies often issue options, warrants and
convertible promissory notes.
© 2015 Fredrikson & Byron, P.A.

5. How many shares
should a company have?
• Typical for a tech start up to have 10,000,000 shares of
common stock to start.
• Be aware that in Delaware the number of shares will impact
the amount of annual franchise tax the company is required to
pay.
• Object is to have enough shares to issue to founders, other
service providers and initial investors.
• The fewer number of shares you have authorized the greater
the minimum percentage of the company that you can grant or
issue. For example if you have 100 shares authorized the
smallest percentage you can grant would be 1% (i.e., one
share).
© 2015 Fredrikson & Byron, P.A.

6. How are shares created?
• Shares are created in a company’s Charter. See
sample.
• Initially this is done by the incorporator in the initial
filing but after shares are issued changing the
number of authorized shares requires approval of
the board of directors and/or shareholders.
© 2015 Fredrikson & Byron, P.A.

7. What type of shares are there?
• Generally
• Common Stock and Preferred Stock
• Voting and Non-Voting
• Many nuances, particularly with respect to Preferred Stock.
Common variations relate to:
• Liquidation preference
• Participation after preference
• Dividends
• Redemption
• Voting rights, protective provisions
• Anti-dilution protection
© 2015 Fredrikson & Byron, P.A.

8. How does a company create different
classes and series of shares?
• If the company’s charter includes what is know as “blank
check” authority, the board of directors may by resolution
create a new class or series of stock.
• If the company does not have blank check authority,
creating a new class or series is done by amendment of
the company’s charter which requires approval of the
board and shareholders.
© 2015 Fredrikson & Byron, P.A.

9. How are the terms of shares changed?
• Before any shares of the series have been issued:
– By the Board, if it originally created the series with “blank check”
authority.
– By the Board, with approval of the shareholders, if the Board did not
have “blank check” authority.
• After shares of the series have been issued:
– By the Board, with approval of the shareholders.
– Approval may require a vote of holders of the series, voting separately as
a class, if the Charter or the governing state law requires a class vote.
• MN: If the amendment would “change the rights or preferences of
the shares of the class or series.”
• DE: If the amendment would “alter or change the powers,
preferences or special rights of the shares of such class so as to
affect them adversely.”
• Dissenter’s rights may apply under some state laws.
© 2015 Fredrikson & Byron, P.A.

10. What is the difference between
authorized shares and
outstanding shares?
• The number of “authorized” shares of any class or series
or in aggregate is the number provided for in the
company’s Charter. See sample.
• “Outstanding” shares are shares that have been issued
by the company and not redeemed, repurchased,
exchanged or cancelled.
• The number of shares issued is not necessarily the same
as the shares outstanding as the company may have
redeemed some of the issued shares (“treasury stock”) or
taken other action that reduces the shares outstanding.
© 2015 Fredrikson & Byron, P.A.

11. How are shares “ issued” ?
• The company’s board of directors must approve all
issuances of securities.
• Typically, issued shares would be evidenced by a
stock certificate signed by one or more officers of
the company.
• Whether or not the company’s shares are
certificated, the company will make an entry in its
stock records reflecting the name of the
shareholder, number of shares issued and the date
of issuance.
© 2015 Fredrikson & Byron, P.A.

12. How many shares
should each founder have?
• Difficult question; it depends on relative value and
fairness.
• Considerations include contribution to the founding
business idea and related IP, anticipated contribution to
the company in the future, capital invested, and ability to
raise capital.
• See http://foundrs.com/
• Of the authorized shares founders generally initially hold
50% to 80%.
© 2015 Fredrikson & Byron, P.A.

13. Should Founders’ shares vest?
• Yes, vesting protects other founders and equity holders
from what is know as “free-riding,” that is a founder
receives a significant percentage of the company and
does not do his fair share of the work going forward.
• Founders’ shares are at least in part in exchange for
services and support in the future.
• Investors will generally insist on founder vesting,
particularly in the early years of a company’s existence.
• Often replacing a founder that has left the company for
any reason (good or bad) requires issuance of equity to
his or her successor.
© 2015 Fredrikson & Byron, P.A.

14. Should a company have
an “ option pool” ?
• “Option pool” refers to the shares that are reserved for grants
or have been granted pursuant to equity incentive plans.
• Most startups have option pools that are used for grants to
service providers (i.e., employees, contractors, directors).
• The option pool is typically between 10% and 25% of the fully-
diluted capitalization of the company.
• Investors will expect an option pool and generally will require
that it be included in calculating the pre-money per share
price.
• Shares reserved in an option pool are most often used to grant
service providers restricted stock, incentive stock options
(ISO), and non-qualified stock options (NQSO).
© 2015 Fredrikson & Byron, P.A.

15. How does a company create
an option pool?
• An option pool is created when the company adopts an equity
incentive plan.
• The authorizing resolutions include (directly or by reference) the
number of shares available for issuance under the plan and reserve
these shares from the company’s authorized shares for issuance
under the plan.
• The number of shares authorized under the plan (and all other plans)
will be the “option pool.”
• Within the option pool there are “available shares” and “unavailable
shares” (or similar designations).
• Available shares are the number of shares reserved for issuance
under the plan minus the number of shares covered by outstanding
options or that have been issued.
© 2015 Fredrikson & Byron, P.A.

16. What “ stock records”
should a corporation have?
• Cap Table (summary of authorized and issued shares)
• Stock Ledger (chronological record of shares issued or
transferred)
– Separate stock ledger for each class and series of
stock
• Option Ledger (chronological record of options granted,
exercised, or terminated, including vesting schedules)
• Shareholder List (who are the shareholders and how
many shares or options do they hold at a specified
date)
• Shareholder addresses and contact information
© 2015 Fredrikson & Byron, P.A.

17. Why is it important to keep
good stock records?
• Who owns the corporation
• Who is entitled to vote as a shareholder
• Exit transaction – who gets paid, and how much
• Exit /financing transaction – due diligence
• Exit / financing transaction – support for legal opinions
• Shareholder inquiries – how much did I invest?
© 2015 Fredrikson & Byron, P.A.

18. What does a cap table look like?
ABC, Inc.
CAPITALIZATION SUMMARY
December 31, 2014
No. of SharesOutstanding Fully Diluted
Shares No. of Shs %of Cmn Stk %of
Authorized Outstanding ShsO/ S Equivalents F/ DShs
COMMON STOCK 15,000,000
Common Stock issued and outstanding 6,000,000 51.7% 6,000,000 43.3%
Stock Option Plan - options outstanding (common) - 0.0% 1,300,000 9.4%
Stock Option Plan - shares available for additional options - 0.0% 950,000 6.9%
Warrants for Common Stock - 0.0% - 0.0%
SUBTOTAL- COMMON STOCK 6,000,000 51.7% 8,250,000 59.6%
PREFERREDSTOCK
Series AConvertible Preferred Stock 2,250,000 2,200,000 19.0% 2,200,000 15.9%
Series BConvertible Preferred Stock 3,500,000 3,400,000 29.3% 3,400,000 24.5%
TOTAL 20,750,000 11,600,000 100.0% 13,850,000 100.0%
Classand Seriesof Stock
© 2015 Fredrikson & Byron, P.A.

19. What does fully diluted mean?
• Total number of shares of common stock outstanding,
plus all shares of common stock issuable upon exercise
or conversion of outstanding options, warrants, preferred
stock, and other securities.
• In the case of calculating price per share fully diluted
generally also includes all shares authorized for issuance
under all equity incentive plans. See below.
© 2015 Fredrikson & Byron, P.A.

20. How is a per share valuation
calculated?
• Pre-money value of
company divided by
“fully-diluted” number of
shares.
SURGE, Inc.
Pre-Money Capitalization
Stockholders FD %
Common Stock SeriesA Fully Diluted
Founder 1 4,000,000 - 4,000,000 34.50%
Founder 2 2,500,000 - 2,500,000 21.56%
Founder 3 1,500,000 - 1,500,000 12.94%
Stock OptionsIssued 500,000 - 500,000 4.31%
Stock Option Available for Grant 500,000 - 500,000 4.31%
Option Pool Increase 2,595,000 - 2,595,000 22.38%
Total Issued Shares 11,595,000 - 11,595,000 100.00%
Series A FinancingDetails
Pre Money value 3,000,000
Price Per Shares 0.2587
New Money 1,000,000
New Shares 3,865,000
Post-Money Capitalization
Stockholders FD %
Common Stock SeriesA Fully Diluted
Founder 1 4,000,000 - 4,000,000 25.873%
Founder 2 2,500,000 - 2,500,000 16.171%
Founder 3 1,500,000 - 1,500,000 9.702%
Stock OptionsIssued 500,000 - 500,000 3.234%
Stock Option Available for Grant 500,000 - 500,000 3.234%
Option Pool Increase 2,595,000 - 2,595,000 16.785%
New Investors (SeriesA) - 3,865,000 3,865,000 25.000%
Total Issued Shares 11,595,000 3,865,000 15,460,000 100%
Shares
Shares
© 2015 Fredrikson & Byron, P.A.

21. Resources
• http://avc.com/
• http://www.feld.com/
© 2015 Fredrikson & Byron, P.A.

22. Samples
• NVCA form of Certificate of Incorporation
© 2015 Fredrikson & Byron, P.A.

23. Contact Information
Eric Madson
Fredrikson & Byron, P.A.
emadson@fredlaw.com
612-492-7394
Kevin Spreng
Fredrikson & Byron, P.A.
kspreng@fredlaw.com
612-492-7395
Patrick Donohue
Hill Capital Corporation
© 2015 Fredrikson & Byron, P.A.