Notes

Dummy Post-Paid Stock Options and Cap Tables
" startup (culation of value in a cap table) " is one of the eternal laws of venture capital. " CAP (cost effective capital), for those of you who do not know, is basically a financial statement that presents the information necessary to make an informed decision as to what should be invested in terms of time, money and other assets. You can think of it as the ultimate and inarguable statement of how much should be invested in a given project. For example, if I am working in the construction business and we are working on a very nice new high-tech school building, and we are all going to get a big fat equity line from some private investor willing to shoulder the risk of building the school, well, obviously that's the kind of investment we're looking for.

But when you're just starting out, what do you do? You must know the basics of cost effective ownership or you can't go into business for yourself. startup 'll want to learn is all about the cap table. You need to know the basic definition because this is the most important factor that determines your ROI. This is what determines whether you are actually profiting from your investment or whether the new investors just got lucky with their choice of shares.

So then how do we arrive at these numbers, especially when we are using sophisticated cap tables? Simple, with a bit of cap table math. In a nutshell, this is basically the equation used by hedge funds, venture capitalists and others to determine the value of shares for a given time frame. There are a number of different formulas used but the main idea is to find the best and cheapest way to acquire shares based on the relative likelihood of you making a profit and also the overall return on investment. You basically want to calculate your ROI, which is basically your return on investment divided by your cost or price per share times your start up costs, your maintenance costs, and other things.

Now before we get into the cap table math part, let's talk about how you determine your ROI. Your math equation basically boils down to this: Expected Earnings / Number of Outstanding Shares x Current Earnings x Cost to Acquire Shares x Current Price to Invest in Shares x Number of Years it Takes to Break Even or Raise Value Once you reach these numbers. Of course, your actual profits will depend heavily on how much of an investment you choose to make as well as the current prices of shares and even more so with companies that are trading well. You need to be aware that stock prices are based on supply and demand so if there aren't enough buyers, prices will stay low, which is a very bad thing. However, if there are plenty of buyers, prices will be too high, which is a good thing.

There are several different ways that you can determine your post-money valuation, which is basically your future earnings potential. For instance, you can use forward-looking financial statements such as operating income statements, gross profit statements, and net profit statements and last but not least, you can use the historical performance of a company. Forward-looking statements can help you decide whether a company is actually earning what it is expected to or whether it is losing money. For cap table math, using historical data is an important step because it can help you determine how much you should pay for a given share.

However, one method that is often overlooked when it comes to calculating post-money valuation is the use of cap table math with regards to company liquidity. Basically, this is how you determine whether or not you need to raise capital to finance growth or if you simply have enough capital to operate the business as is. There are some companies that have significant growth potential and others that are not that promising financially but have huge potential for growth due to their sheer size. If you have strong numbers suggesting that the business will be able to withstand tough times but you still want to raise enough capital, then you need to calculate the effect of interest rates, dividends, and other events on the value of the business. In most cases, a company's liquidity will either go up or down depending on these events so you need to keep this in mind when figuring out your percentage ownership stake.

The last thing you need to know about post-money valuation is what type of financing is used to finance the business. Usually, entrepreneurs seek venture capitalists or angel investors when they are looking to raise funding for their businesses. This capital is typically given in the form of a term sheet, preferred stock, or an warrant. The term sheet provides information about the equity holders, common shares, and assets owned by the company. On the other hand, the preferred stock and warrant are two types of capital that can be used when raising small amounts of capital.

Demystifying term sheets and cap tables also helps entrepreneurs see where their money is coming from in order to know how much to raise from angel investors or venture capitalists. In addition, it helps them compare the value of their business against the prices paid by similar companies to get an idea of the market value of their shares. Post-money valuation also involves an important concept called dilution. This means that, for as long as they own the shares, entrepreneurs will lose some of their investment. Dilution can either make the valuation more or less negative and is one reason why the formula for calculating a company's diluted share value is different from the one used for calculating the net worth.
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