By Brad Feld (Managing Director, Foundry Group)
Jane and Dick, our fearless co-founders of SayAhh, have set up an accounting system and created their first set of financial statements.
This week, they set out to create their cap table and hire a CTO. The founders each have common shares that will vest over four years. The vesting schedule protects each of the co-founders in case one gets hit by a bus or decides to drop the project after a short period of time.
Also, there is an important tax election called an 83(b) election that they made which allows them to recognize and pay taxes for very small income of the value of the shares. Later, if they sell, the low tax basis and capital gains tax rates result in a lower tax liability than if they didn’t file the 83(b) election.
Equity is split 55% and 45%, but where is that officially recorded? It is not in the three primary financial statements (the Balance Sheet, Profit & Loss, and Cash Flow Statement.) Rather, it gets recorded in a document called the Capitalization Table (or “Cap Table”), which shows the ownership stake each person or entity has in the business.
» Read the full post at Feld Thoughts.
Editor’s note: Brad Feld blogs on Finance Fridays — This week he introduces the concept of the Cap Table. Brad takes a case study approach to set up all of the pieces before getting into the messy guts. Stay tuned for next week’s Finance Friday!
About the guest blogger: Brad Feld has been an early stage investor and entrepreneur for over twenty years. Prior to co-founding Foundry Group, he co-founded Mobius Venture Capital and, prior to that, founded Intensity Ventures. Brad is also a co-founder of TechStars. In addition to his investing efforts, Brad has been active with several non-profit organizations and currently is chairman of the National Center for Women & Information Technology. He blogs at www.feld.com and www.askthevc.com.
