How do you talk shares with angel investors and VCs?

Cap Table - Part 5

We learned all about the different UK share classes in our last two posts. Now we will learn about the different types of shares and other terminology that founders need to know in order to understand the angel investors and venture capitalists.

Types of shares

Authorised share capital: This is the maximum number of shares a company is legally allowed to issue as defined in the company’s formation document (the Memorandum and Articles of Association). Please note that under the Companies Act 2014, a limited company is no longer required have a specified authorised share capital.

Issued share capital: The total number of shares actually issued, i.e. the shares held by all stakeholders in the company. This does not include warrants and options.

Diluted share capital: This is the “theoretical” share count and company ownership if all of the convertible securities, granted options, and warrants. In other words, it is the current issued share capital, plus all the “potential” shares. A calculation of the fully diluted shares gives founders the full picture of the ownership structure.

Other Terminology

Liquidation Preference or Liquidation Priority: This is a right that can be attached to preference shares that gives investors additional return. This right applies not only in a poor outcome (liquidation of a failed company), but also in best case outcome (successful sale of company). For example with 1.5 times preference, the investor gets £1.50 for each £1 invested.

Vesting Periods and Cliffs: It is critical to include vesting periods and cliffs when you grant shares and options. What this means is that the employee does not actually own the shares or options until a preset time has passed. Never incentive employees with share options or shares without vesting! After all, what is the incentive to work or stay if the employees own them from Day 1 of granting.

Founders need cliffs and vesting periods! Cliff vesting and vesting periods protect the founders and employees who stay as the company grows. If an employee leaves or is terminated before the end of the vesting period, the vesting stops and the company returns the unvested options back into the option scheme pool for other employees (or if shares were granted, buys back the unvested shares at the same nominal value at which they were bought).

Okay, your eyes are now glazed over by all the definitions… But you now have the building blocks of the capitalisation table. Next step - Let’s build a cap table. 

Still, don't know how to go about your cap table? Find out how our team of mentors can help you: https://www.activateventures.co.uk/mentoring