Notes

Why Investors Should Create a Pro Forma Cap Table
A pro forma cap table is a spreadsheet which depicts the capitation structure of an enterprise today, both immediately after an initial investment (i.e. on a pro forma) and also on a prospective capital increase (i.e. on a regular basis). It depicts the percentage shares owned by original shareholders, fully diluted, immediately after a capital increase, and/or common and preferred shareholders among many other things. Note that it is an accounting product, which is meant to represent what the shareholders would actually receive if they did not suffer a decline in the value of the corporation's stock.

Investors are not told what the price per share will be at any given time throughout the duration of the investment. So, it can be used as a money management tool for determining underwriting a deal, or for determining whether to retain an existing shareholder as an entity for the duration of the investment. It can also be used as a sales tool by projecting future profits for the corporation based on current prices of the stocks. For instance, if a particular stock has a low price per share, an investor may conclude that he or she should purchase shares of that stock in order to realize a profit over time. The pro forma cap table can be used to determine if the investment would be better received by selling the stocks now, or waiting and earning more through the dividends over time.

To perform a pro forma cap table, first obtain a copy of the latest cumulative registered equity (CRE) numbers for the corporation. Then open an excel spreadsheet and locate the CRE numbers of each of the original founder members of the business. Next, access the shareholder's data file for each of the individual founders as it will be easier to obtain the ownership information for these individuals from the shareholder data file. Once all the founders are located, open the spreadsheet and copy down all of the ownership information for every member of the business as well as any other partners that have been associated with the company during the course of its operations.

The pro forma cap table should be calculated once all of the owner information has been copied accurately. Once the information has been copied correctly, copy the number that is usually located on the initial public offering notice for the financing round. Insert this number into the cell representing the valuation of each of the individual shares of capital stock. You should also include all of the capital funding sources for the company as well as any debt funding. In most cases, the financing round will be disclosed on the investor document for the respective financing round.

The pro forma cap table should be organized by company type. This will ensure that the valuation can be performed on an appropriate scale for that specific company. For example, a oil and gas company may have very different interests than would be the case for a technology or chemical company. The valuation should take all of these factors into consideration when determining the value of the company's equity. The numbers that will be used in the spreadsheet should be consistent with the numbers that are found on the investor document for the financing round. If the company is in the early stages of development, it is a good idea to add the cost of capital as this will be reflected in the bottom line numbers.

startup prefer to use the Excel spreadsheet provided by the financial reporting firm that is providing the valuation services. If the investment firm is using the same software program that the valuation software uses, this is often preferred because the investors can use the same calculator for all of the rounding methods that they need to calculate the pro forma cap table. Some investors are comfortable with rounding to the nearest whole number. Other investors want to round to the closest tenth of a percent. Regardless of which rounding method is chosen, however, it is important to ensure that all investors are comfortable with the method chosen for the computation of their pro forma cap table.

The formulas for computing the pro forma cap tables are based on mathematical equations. This means that it is not the easiest thing for a person to do. This is especially true if the person does not have any experience with financial statements. People who are familiar with financial statements and the accounting procedures that go along with them will find it much easier to compute the pro forma cap tables and the other kinds of equity valuation that are required for financing rounds. The use of an accountant is recommended whenever the person is involved with the preparation of financial statements for a business.

Many investors prefer to use the formula and spreadsheet programming provided by an operator to complete the calculations for them. Using such formulas can be helpful, but they can also be time consuming and complicated. For most investors, it is more effective to consult an expert equity valuation and finance advisor who will provide them with easy to understand and operate formulas for computing the pro forma cap table. There are people who are very skilled in the field of computing and who are willing to help their clients in their own homes. This makes it very easy for a person to create a pro forma cap table if he or she is familiar with the process that is involved in computing businessequity and debt valuation.
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