TL;DR: After a priced equity round, keeping track of various stockholder voting rights can get complicated. Use Excel to create a voting tracker to make it simpler.
Download the open-source cap table and the example spreadsheet.
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Your Series B is fast approaching, and it’s time to think about soliciting stockholder approval to amend the certificate of incorporation and the stock plan. The Series B lead investor, Dr. Fünke’s 100% Natural Good-Time Family Venture Partners, has made it clear that it expects the existing investors to waive any participation rights, regardless of whether they participate in the upcoming round.
You vaguely recall from the negotiations of your Series A transaction documents, led by your trusty startup lawyer, that holders of a majority of the capital stock (common and preferred) are required to amend the certificate of incorporation but that the holders of the preferred stock, voting together as a single class, have a separate blocking right over any amendment authorizing a new series of preferred stock. You also remember, after consulting the Investors’ Rights Agreement, that only Major Investors have participation rights and that the holders of a majority of the preferred stock then held by the Major Investors can waive those rights.
Sounds complicated, but is there an easy, customizable way to use Excel to track which holders you need to sign? You bet there is!
Voting tracker
My preferred approach here, shown in the example spreadsheet, is to add one Voting column to the cap table regardless of how many separate class votes you are tracking. Each cell should have a toggle switch for (x) a “yes” vote or (y) a “no” vote or “not approached.” For each class vote, a formula in a box below the cap table can total the share numbers of the “yes” votes and compare it to the required approval threshold for that class, e.g., a majority or some other specified threshold. I’ve called the new column Voting (Y/N).
To minimize errors, let’s restrict what values are allowed in the new column to just Y or N. To do this, select the cells in the column, go to the Data ribbon, then click Data Validation > Allow: > List > Source: > type Y,N > OK. That should create a drop-down menu in each cell that allows you to toggle between Y and N for a vote.
Class vote: overall capital stock and preferred vote
The skeletal voting tracker above allows you to keep track of whom you expect to vote yes or no (or whom you don’t want to approach) on a particular matter, but now you need to be able to tell whether the “yes” group gets you across the various thresholds set up by state corporate law or your stockholders’ agreements.
Let’s start with the simplest case – a bare majority of overall capital stock, which Delaware law requires to amend a certificate of incorporation. In plain English, you will ask Excel to cycle through the “yes” votes and for each one, add that holder’s number of outstanding shares to the overall “yes” pile, then compare that to the number of shares necessary for a bare majority. The SUMIF() function is an efficient way to do this. Below the cap table, add a separate two-cell box labeled Majority of Capital Stock?. In the output box, add a formula equivalent to SUMIF( [Voting column], “Y”, [Total Shares Outstanding column] ) > [Sum of Total Shares Outstanding] / 2. That will return TRUE if the number of “yes” votes constitutes a majority and FALSE if not. (This assumes your preferred stock converts to common stock on a 1-to-1 basis; if not, you’ll need to use common equivalents for the preferred. Check with your lawyer if you’re not sure.)
This output cell is another good use of conditional formatting. Highlight the output cell and head up to the Home ribbon. Click Conditional Formatting > Highlight Cells Rules > Equal To > type FALSE > select Light Red Fill with Dark Red Text > OK. Do the same for TRUE and Green Fill with Dark Green Text. That makes it easier to visualize different scenarios as you game out approaching your stockholders.
For many major corporate actions, your certificate of incorporation might require you to obtain consent from some group of preferred stockholders if you have already completed an equity financing. That might be a simple majority, a supermajority, or some other threshold ensuring that a lead investor can control the vote. The denominator might be all preferred shares taken together, or all of one or more classes of preferred, or some combination. The formula for calculating a majority of the preferred vote is the same as calculating an overall capital stock vote, except that you replace the total shares outstanding column with the preferred shares (or specific class of preferred shares) outstanding. For a threshold other than a majority, make sure you compare the “yes” votes with the number of votes required to satisfy that threshold. If the threshold is phrased as “at least x shares” or “at least y%,” use the operator >= (greater than or equal to) rather than just > (greater than) in your SUMIF() formula.
This is a heavily negotiated area with with a lot of variation and custom charter language. So as with all of this, be sure to consult your trusty startup lawyer for advice in ensuring that you have the voting thresholds absolutely right. Getting it wrong can cause major problems.
Who are my Major Investors again?
Years or even mere months after your Series A round, you might not remember which of your investors qualify as Major Investors (sometimes called Major Purchasers or similar), particularly if all of your investors get regular financial updates from management regardless of formal status. You can look at your Investors’ Rights Agreement, or your Stock Investment Agreement in the case of a Series Seed round, but you’re not likely to find a list. Instead, the definition of Major Investors will be more flexible and opaque, such as “any Investor that, individually or together with such Investor’s Affiliates, holds at least n shares of Registrable Securities (as adjusted for any stock split, stock dividend, combination, or other recapitalization or reclassification effected after the date hereof).” Another variation might be “any Purchaser holding that number of shares equal to or in excess of the quotient determined by dividing (x) the Major Purchaser Dollar Threshold by (y) the Purchase Price, rounded up to the next whole share,” where “Major Purchaser Dollar Threshold” is a fixed dollar amount. Sometimes, individual investors will negotiate Major Investor or equivalent rights separately, in the main documents or side letters.
The below discussion has some overlap with the “Participation Rights and ‘Major Investors’” article. That article also shows how to calculate each Major Investor’s participation rights.
Major Investors: share numbers
The first variety of Major Investor definition, phrased in terms of share numbers held, is easy to handle as long as you know the terminology. “Registrable Securities” generally means the number of common shares into which preferred shares can convert. That usually starts at 1-to-1 but can change after a down round or in certain other circumstances. “Affiliate” generally means a person or entity that controls, is controlled by, or is under common control with an investor. For example, an individual general partner or a sidecar fund investing alongside a VC fund would be “affiliated” with that VC fund for purposes of determining Major Investor status.
To visualize this, add a column at the end of the cap table labeled “Major Investor.” For each holder, add up their number of preferred shares and compare it to the constant Major Investor threshold. A formula model would be SUM( [Series A-1 shares], [Series A-2 shares] ) >= [Major Investor share number threshold] ). This will return TRUE (for Major Investors) or FALSE (for non-Major Investors); I’d recommend using conditional formatting to highlight at least TRUE values to make them easy to see.
Major Investors: dollar amounts
The second variety, phrased in terms of dollar amounts invested, is trickier but often makes more sense if preferred shares have been issued at different prices, such as from a convertible note or SAFE conversion. That is, two investors might each hold 500,000 preferred shares, but one put in $250,000 in a SAFE that converted in the Series A at $0.50 per share and the other put in $500,000 of new money in the Series A at $1.00 per share. Setting the Major Investor threshold at greater than $250,000 and less than or equal to $500,000 rewards the later investor for writing a bigger check.
To calculate this, start by identifying the per-share prices actually paid for each series of preferred stock, e.g., $0.50 per share for the SAFE conversion shares (often called Series A-2) and $1.00 per share for the new-money shares (Series A-1). Multiply each holder’s number of shares of each type by the applicable price, add them all together, then compare to the Major Investor threshold. In Excel language, it would be SUM( [Series A-1 shares] * [Series A-1 Price], [Series A-2 shares] * [Series A-2 price] ) >= [Major Investor dollar threshold]. Again, use conditional formatting to make the resulting TRUE or FALSE outputs easily visible.
Major Investors: waivers
If your Investors’ Rights Agreement or Stock Investment Agreement allows the holders of a majority of shares held by only the Major Investors to waive their participation rights (not always the case – check with your lawyer), you’ll need to add to your voting tracker. An easy way to do this is to add a column labeled Total Shares Held by Major Investors. This column tests whether each holder is a Major Investor and, if so, adds their shares (including common and preferred, but check with your lawyer on what’s correct) to the new column. Ensure that the Excel table automatically calculates the total number of shares below the column.
Then, follow a similar procedure for tracking a class vote: Add an output box below the cap table labeled Major Investor Majority? and use the SUMIF() function to test whether the holders voting “yes” are enough for a majority of the shares held by all Major Investors.
Lawyer note: If you have investors that may be affiliates of one another (such as multiple funds with the same management company or an individual venture capitalist investing alongside her fund), there’s no way for Excel to know. But it might materially affect the Major Investor analysis. You might need to either edit individual formulas manually for affiliated investors (e.g., add the affiliates’ shares together to test against the threshold) or create a new cap table that lumps affiliates together. Your lawyer will help you sort this out. Bear in mind that you as a company insider might have more visibility than your outside lawyer into who might be affiliated, particularly if you switched firms between rounds.
Next topic: Anti-dilution protection in a down round
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