Notes

Understanding Cap Table Math
A VC cap table (cap table) helps investors and venture capitalists calculate the value of the company before they invest. The purpose of a VC cap table is to help investors and venture capitalists determine the ownership stake or equity value of a company. The use of a VC cap table is highly useful in raising investment capital from private equity investors, venture capitalists, and angel investors. A VC cap table helps investors and venture capitalists calculate the value of the company by identifying the equity factors associated with specific aspects of the business.

A VC cap table allows investors and venture capitalists to calculate the total funding required to start and operate a business as well as potential profits and losses associated with specific aspects of the business. The first section of a VC cap table compares historical ownership percentages with current market values for similar types of companies. The second section provides an analysis of management information. The third section examines financing and debt characteristics of the company.

startups and analysis tools can be complex and technical. To make the analysis more meaningful, VCs use several standard measurements to compare businesses in terms of valuation, dilution, control, ownership, and financing. Some of the common measurements used in VC valuation and analysis are free cash flow, EBIT (earnings before interest and tax), PEG ratio, book value, equity size, debt to equity, and reinvestment. These measurements can also be negatively and positively correlated with each other.

Determining the value of a company is the main objective of most private-equity investors and venture capitalists. They try to purchase a controlling interest in the startup by determining the intrinsic value of the business. This process is called dilution. During the early stages of a venture, most private-equity investors do not have a long-term track record of successful business deals. The startup has to rely on capital provided by angel investors and venture capitalists, and it may take years for the business to show consistent profits.

A good cap table should include accurate rounding of values for all numbers in the calculation. In addition, good cap tables always take into account the financing required to acquire the shares of ownership. Good cap tables allow for the calculation of weighted average cost of capital. This allows the readers to compare different businesses by considering their likelihood of obtaining necessary financing.

The option pool refresh is another important tool used in calculating a reasonable price for convertible notes and warrants. Option pool refreshes are calculated through the use of multiple regression with options traded on multiple stock exchanges. For example, the company could list its convertible note on the OTCBB and its warrant on the AMEX. The multiple regression will estimate the expected returns of each option through the time period the option is purchased and through the time period the convertible note is purchased.

Capitalization tables that are available online are excellent for beginners because they are very simple to understand and to utilize. Capitalization refers to the total number of times an investor will receive a return on his or her investment. Dividing the net capital gain by the total number of times the investment is made would yield the net worth of an investor. An investor who receives regular dividends is not capitalized, but if the dividends are reinvested in the business the owner would be considered as having capitalization. On the other hand, when an option is purchased that does not give the owner any potential returns, the share is not capitalized.

One other important consideration is that of dilution. Most cap tables provide the owner with a dollar figure relating to dilution. startups refers to the increase in value of shares over the total number of outstanding shares. Dividing startups by the total number of shares gives the net worth per share, which is the cap table's recommended range. Therefore, it is essential that investors who purchase shares on the stock market and who also wish to perform the necessary calculations based on cap tables should educate themselves about dilution and then choose a particular cap table that they think suits their needs.
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