• Hoffman Beyer posted an update

    A simple cap table is also known as a cash flow forecast or simply a C.F.T. model. Essentially this is an economic forecasting model which is implemented with the intention of finding the most economically viable option for all shareholders and debt holders when any particular transaction or debt issue is made available to them. The term simple in it’s self really just refers to the fact that any given transaction that results from a shareholder approval (or failure to object) is essentially placed into place as part of a cash flow forecast and not necessarily as a direct benefit to any particular investor.

    In a simple cap table template it is common to place each equity and preferred capital component individually and then to group these components into one main bucket or value range. This can be achieved by using the “group by” attribute where the order in which they are placed impacts the return you will receive on your investment. We will use Microsoft Excel to complete the example here. The first sheet will show all shares which a particular shareholder owns i.e. the Company Name, common shareholders (rows), voting power (voids), and control as it applies to options (colours).

    The second set of tables will list each individual security or equity that is owned directly by that shareholder i.e. the Company Name, company shares, preferred stocks (colours), and common equity which represents all others of which are owned indirectly via a subsidiary. The third set will list all other categories of which these shares are a constituent i.e. the Company Title, common shareholders, control, and the effect of derivative instruments which may be included either explicitly or by implication within the business entity as regards their ownership interests i.e.

    From this information you can work out how many rounds of capitalization have been required to achieve the current level of equity in the Company. Remember you are looking at the Company’s capital structure through a long term perspective and therefore the longer term share holders own a greater number of shares. Therefore the actual number of rounds of capitalization you need to analyse should be based on how many founders you have and how many investors are active in your round of funding. You can calculate this number of rounds by subtracting the round of capitalization from the total number of common shareholders that have capitalised in that round.

    Once you have the information needed in your simple cap table you can move onto calculating the relative sizes of the companies worth. Remember this is an industry focused on valuation based on founders and the amount of capital they have invested in the business thus far. These numbers can be calculated by dividing the current market value of the Company’s equity by the total number of common shareholders i.e. founder’s equity multiplied by the average number of rounds of capitalization. This can be a very rough calculation as many factors can influence the valuation of startup businesses.

    Now that you have the basic data on your company it is time to look at the options available for raising new financing. The first option that should be considered is a public offering of shares. This process allows for potential new shareholders to become owners in your business without having to invest the money upfront. There are two main benefits of this process that should be considered when looking at new financing options for your business. Firstly if your business is growing strongly you may not have enough money in the bank to allow you to offer regular dividends to existing investors, so an option pool may be your only option if you wish to keep any of your capital at your current level.

    Secondly, startups prefer to see a full year of year end results in order to be comfortable with their investment in you or your business. An option pool will give your potential investors the opportunity to see growth over the full year and gives them some assurance that their money is safe. You should also look at how your founders have capitalized their shares in the past, as well as the financial results that have been achieved by your founders. A simple cap table can be used to calculate a fair price for your shares and help you make the right choices for capitalization.

    One option that can be used for raising small amounts of capital is to offer pre-money shares. This works best for companies that have not yet received seed money or have low risk in relation to their business. Pre-money shares carry less risk than traditional financing rounds and provide a simple and effective way to finance your business’s growth. These types of financing rounds do require one year of income in profits for the founders or owners of the business, which can reduce the valuation of your business during the pre-seed period. However, if you are able to raise a significant amount of pre-money shares then your price will generally be much higher than you would pay for a regular financing round.