Goals with this template are:
1. Help entrepreneurs understand how a cap table is structured
2. Illustrate how ownership changes with valuation in Series A and Series B financing rounds
3. Increase efficiency during the diligence process
Notes to help fill out the Cap Table Template:
- Notice that the template has different colored tabs at the bottom, which will show cap tables before financing and through the Series A and Series B rounds. The last two tabs are simply summaries for easy printing.
- The only cells that need to be filled in are in blue font. All other cells will auto-populate.
‘Pre-Investment Cap Table’ tab:
- Enter your current cap table and ownership of common securities for employees here. If you have more employees than spaces in the table, you can add them up and include them in “other employees” line.
- Every employee does not need to be listed in order to understand how the ownership changes with investment.
- All of the initial share counts are place holders, and not intended to advise entrepreneurs on how to divide up stock among employees.
‘Convertible Notes’ tab:
- This tab is for companies who have taken a convertible note or SAFE investment from angel investors.
- Typically, convertible notes have an annual interest rate, a discount, and/or a cap for conversion into the next financing round. The template is set up to let you enter all variables (convertible notes often have both). If the convertible notes to your company do not have one of these variables, just enter ‘zero’ for those inputs.
- As noted in the red font, if your company has not taken any investment in the form of convertible notes, just enter zero for the “Principal Amount” in column B.
‘Series A’ tab:
- Pre-Money valuation in this example is $6 million. This means that the investors have placed a value of the current business (prior to funding) of $6 million. This number can vary widely for start-ups depending on many factors, so again, please note that this is just a placeholder for the template.
- When investors fund a Series A round, the option pool is often increased so that the company will have equity to give to new hires. Somewhere in the 10-20% range is typical for most early stage start-ups, but this depends on planned hires, current option pool size, and other factors. You will see that the options are added to the cap table prior to Series A round and therefore, included in the total share count to calculate the share price.
‘Series B’ tab:
- For companies planning to become cash flow positive on the Series A funding, this tab might not be needed. However, many companies that raise a Series A often raise a Series B round to execute on early success before becoming cash flow positive.
- Much like the ‘Series A’ tab, the ‘Series B’ tab only requires a few inputs as well – Pre-money valuation, Series B investment sizes, and option pool increase.
- In this example, we entered $18.5 million as the Pre-Money valuation. As with the earlier Pre-Money valuations, this number can vary widely depending on a multitude of factors.
- Often, when a company raises a Series B, it will be led by a new investor, who sets the price for the round. When this happens, the Series A investors often invest additional money into the round. The template is set up for this, but you could just zero out one of the investor lines if your company raises money from your current investors or the B investor financed the complete round.
As you might imagine, when the S3 Team is meeting with entrepreneurs and founding teams, funding needs are a common topic. When raising money, entrepreneurs should always be prepared to answer the question “How much money do you need, and how far will that get you?” Very often, the answer is “We need $X million dollars in funding to accomplish these goals: X, Y & Z.” As investors, that is the answer we want to hear. Unfortunately, quite often when we begin to dig into the “why” behind that answer, it becomes less clear and a lot of time is spent between investors and the management team getting to the right answer. Too often, the number is much higher or lower than the original “$X million” answer.
We understand that as entrepreneurs, you have a lot going on – building your product, hiring an “A” team, signing up new customers, raising money, etc. Many times, building a financial model to forecast operating expenses and cash needs gets pushed further down the list, especially if you do not have a financial background. This creates a problem when investors begin to look into the detail behind the numbers and expenses during diligence. Not having a solid operating model in place delays diligence time as investors attempt to get a handle on the cash needs. This can be crucial time for a cash-strapped company. The S3 Ventures operating model templates are free resources that we hope will help entrepreneurs accomplish two goals:
1. Better understand their business and the expenses involved to get cash flow positive
2. Streamline the diligence process during fundraising, saving valuable time
S3 hopes entrepreneurs will be able to utilize this tool to get an accurate, granular view of their business expenses, revenue model, and overall cash needs of the business. We attempted to make the templates simple, with the templates applicable to the 5 most common business models that we typically see: Enterprise SaaS, Enterprise License Software, Medical Device, Consumer SaaS, and Consumer Marketplace companies. Each model generates Balance Sheet and Cash Flow statements with very few inputs. The models do not include capital expenses (or the depreciation associated with them) or inventory management. Below are some notes to help you with the models.
S3 Ventures “Operating Model Template” notes:
- There are five operating model templates from which to choose from, depending on your company’s business model: Enterprise SaaS, Enterprise License Software, Medical Device, Consumer SaaS, and Consumer Marketplace companies.
- All inputs (business drivers) are in blue and shaded – everything else will auto-populate.
- Start with the staffing tab and then work through the departments. As most of the cost of software and medical device businesses is people, the timing and level of hires will be the largest cost drivers in the business.
- In each department, we attempted to capture the typical cost buckets for most startups. If you have other cost categories or line items, you can add rows or drop them into the blank rows.
- The revenue and cost of goods in the Income Statement comes from the green “Revenue” tab.
- While we attempted to provide a template for some basic business models, the revenue drivers in your business will likely be different than the simplistic view we have used in this model. Please add tabs as you see fit and link them either to the existing revenue tab or directly into the ‘Income Statement’ tab. It is important to understand the real business drivers of revenue for your company and incorporate those into this model.
- Equity investments are an input in the Cash Flow statement.
- At S3, we look at a handful of metrics that are remarkably consistent across the companies in which we invest. If you are out of these ranges, you may want to revisit your estimates.
- For enterprise SaaS and enterprise license software companies:
- Total operational expense divided by headcount usually lands at around $15k/head/month +/- $2k. This variability comes from the type of workforce you have (local vs. offshore, very experienced vs. entry level, etc.).
- Salaries and Wages are 60%-75% of total operational expense.
- Gross margins are 90%+.
- For medical device companies:
- There are more variances in operational expenses than for software companies, especially depending on necessity of trials, FDA path, manufacturing process, R&D requirements, etc.
- If the business is a “razor and razor blade model,” consumable gross margins are 80%+, while the durable device gross margins are usually somewhat lower.
- Gross margins on medical devices without a consumable component vary from 50%-90%+.
- For consumer SaaS and consumer marketplace companies:
- For enterprise SaaS and enterprise license software companies:
- Operating expense per headcount, salaries and wages as a % of operating expenses, and gross margins are similar to enterprise software, but more variable, depending on the go-to-market strategy and team required to deliver the product.
- Spending $1 (or less) on customer acquisition (CAC) to yield $3 of customer lifetime value (LTV) is a ratio many companies target because it is indicative of the ability to profitably acquire customers.
- For consumer SaaS companies, monthly customer churn should be below 10% and is frequently in the low single digits. Churn is more variable for marketplace companies. Churn is an important metric to focus on because it is frequently less expensive to retain an existing customer than to acquire a new one.
The S3 Team hopes these templates help you with your business, but we know they are not perfect. If you have suggestions on improving the models or other feedback, please email us at firstname.lastname@example.org. Unfortunately, due to the volume of emails we get, we may not be able to respond to support questions. The S3 Team wishes you well in growing your business! Please submit your business plan and financial model through our website to contact us about funding.
S3 Enterprise License Operating Model
S3 Enterprise SaaS Operating Model
S3 Consumer SaaS Operating Model
S3 Marketplace Operating Model
S3 Medical Device Operating Model
Every day at S3 we see the benefits of a thoughtful, well-articulated and validated business plan. In his book Disciplined Entrepreneurship, Bill Aulet gives excellent advice on how to step-wise organize a new business and its associated product or service. It is the most comprehensive book we have seen on the topic, and we believe following his 24 steps will prepare one optimally for Meeting One at S3. Bill’s thesis is that entrepreneurship can be taught. We agree wholeheartedly. Building a company is not about conjecture, but about a disciplined method for approaching a customer problem, designing a solution and validating that a profitable business can be built around it. Learning, listening and self-honesty with the process are keys we emphasize and Bill articulates throughout. The book covers topics like market segmentation, total available market assessment, life time value of a customer, customer acquisition cost, development of a persona that you will likely be selling to, identifying your core value proposition and business model, knowing how you are competitively positioned, pricing on value (which we think is excellent), and validating your assumptions via an iterative process. All of these are placed in a logical, step-wise order. Threaded throughout is the encouragement to be honest and accurate with all the data collected. Finally, Bill uses real world examples of start-ups that he was involved with, his students were implementing or well know industry examples to illuminate each point. We highly recommend Disciplined Entrepreneurship as a guide to developing your start-up business.