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Venture Capital in New Zealand: A Comprehensive Guide to Capitalisation Tables 

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Venture capital is a common funding source for startups in New Zealand. Over time, this source of funding continues to gain popularity. As such, it is important you understand what venture capitalists look for in regard to a capitalisation (cap) table when investigating potential investments. This article will take you through what cap tables are and their significance in New Zealand’s startup scene.

What is Venture Capital?

Venture capital is a form of private equity financing that investors provide to both startups and small businesses. Investors will provide such funding to companies that they consider have high growth potential. In return, investors receive equity ownership in the company. This allows the investor to receive any potential profits the company makes if it becomes successful. 

Venture capital funds are usually managed by professional investment firms seeking to invest in innovative ventures. In recent years, New Zealand has experienced a surge in venture capital activity. New Zealand has an increasing number of startups and technology-driven companies that are attracting investors’ interest. Of course, venture capital is not the only source of funding available to your startup.  

Understanding Cap Tables 

A cap table is a ledger that outlines the ownership structure of a company. This table records the equity ownership stakes of all shareholders, including its founders, employees and investors. A cap table also outlines the different classes of shares and the percentage of ownership each party holds. 

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Importance of Cap Tables

Cap tables play a vital role in any capital-raising process, including when you are seeking investment via venture capital. This is because cap tables provide a clear picture of a company’s ownership structure. Further, cap tables help investors evaluate potential investments. Venture capital investors will closely analyse cap tables as part of their due diligence investigations into your business. 

As such, you should maintain an organised and up-to-date cap table. This is crucial to instilling confidence in your potential investors. This is particularly important if your startup seeking funding. During later funding rounds, a well-maintained cap table can help streamline the investment process. This is because investors can quickly analyse ownership, dilution levels and the company’s overall capital structure. Consequently, you are likely to experience smoother negotiations with your prospective investors down the line. 

What Does a Cap Table Look Like?

A company’s cap table is a crucial tool that provides a clear overview of its ownership structure. 

Consider a hypothetical startup named ABC Tech, formed by two founders, Alice and Bob. Alice and Bob each hold 500 ordinary shares, resulting in 1,000 issued shares. The initial cap table would look similar to as follows:

ShareholderShares (Ordinary)Percentage held

Incorporating Convertible Notes

Next, consider that ABC Tech raises funds through convertible notes to fuel its growth. The company issues $75,000 worth of convertible notes to Investor C. Investor C may convert these notes into shares in the future. 

The terms of the convertible notes include a 15% discount and no valuation cap. These details are recorded in a separate section of the cap table, as exampled below:

ShareholderShares (Ordinary)Percentage held
NoteholderFace valueCharacteristics
Investor C$75,00015% discount, no cap

Understanding Dilution

ABC Tech also wants to incentivise its key employees so it grants them options to purchase shares. These options represent an ownership percentage assuming they vest in full and are exercised. 

Consider Employee X and Employee Y are each granted 250 options. If all the options vest in full, and are exercised by the employees, the number of shares currently on issue will increase. Consequently, the founders’ (any any other current shareholders’) ownership percentages will be diluted. Here’s what ABC Tech’s cap table would look like after granting options to employees:

ShareholderShares (Ordinary)Percentage heldFully diluted percentage
OptionsSharesPercentage heldFully diluted percentage
Employee X2500%16.7%
Employee Y2500%16.7%
NoteholderFace valueCharacteristics
Investor C$75,00015% discount, no cap

Interpreting Fully Diluted Holdings

In the ABC Tech example above, if all employees exercise their options and 500 new shares are issued, the founders’ ownership will be diluted to 66.6% in aggregate. The ‘fully diluted percentage’ column reflects the “worst-case” scenario for founders. However, the founders’ ownership percentage may be further diluted due to the conversion of the convertible notes on issue. A sophisticated cap table will also be able to show a fully diluted position. This cap table takes into account all the convertible securities on issue (including convertible notes) and various key assumptions. 

The cap table will inevitably become more complex as companies evolve and go through various funding rounds. As such, you need to carefully manage your startup’s cap table. You will be able to make informed decisions if your cap table is organised and up-to-date. This is vital when you are having discussions with your prospective investors regarding future investment.

Cap Table Management Best Practices 

Maintaining an accurate and up-to-date cap table is essential for your startup, especially when you are seeking external investment. This external investment may be in the form of venture capital funding or via another method. Some best practices for you to consider regarding cap table management are outlined below:

1. Use Cap Table Software 

You should invest in dedicated cap table management software. This software can streamline the process of recording and updating ownership information concerning your startup. You will find such tools often offer scenario modelling and reporting. In turn, this makes it easier for you and your startup to handle complex financing rounds and transactions.

2. Regular Audits 

You should conduct regular audits of your cap table to ensure it is accurate. Your cap table should be updated following any financing round. Regularly performing audits of your cap table is critical as minor errors can lead to significant complications in future. 

3. Seek Legal and Financial Advice

You are well advised to engage legal and financial professionals who are experienced in capital raising and cap table management to help you. Such professionals can provide you with valuable guidance and ensure your comply with relevant laws and regulations.

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Key Takeaways 

It is imperative you understand cap tables. Cap tables provide important information regarding your company’s ownership structure. Further, having or not having an accurate and up-to-date cap table can significantly impact your startup’s valuation. Additionally, your ability to conduct future fundraising will be impacted depending on the state of your cap table. Some key ways to manage your cap tables include:

  • using cap table software;
  • conducting regular audits; and
  • seeking legal and financial advice. 

If you need help understanding how cap tables work, contact our experienced corporate lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page

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Emily Young

Emily Young

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