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A pro forma cap table is a financial spreadsheet which represents the capitalization structure of an organization today on a non-cash basis and immediately following an expected capital investment (i.e. on a non-pro forma basis). It depicts the proportionate share of ownership of founders, investors, and early investors, fully diluted, immediately after a capital raise, and separates common and preferred shareholders... Its primary function is to facilitate an easy analysis and interpretation of business statistics.
The term 'pro forma cap table' refers to those sheets of paper that facilitate the study of capital structures. Capital flows between related forms of equity and / or ownership such as common equity, preferred stock, debentures, warrants, bank loans, lines of credit, and others; and between common equity holders and other forms of ownership such as preferred, debt, and equity ownership. The sheet basically summarises the ownership details for the company, including percentage shares by common or preferred shareholders, and other relevant information.
The typical pro forma cap table provides information relating to the number of outstanding shares, preferred or common shareholders, capital funding sources, management information, net debt and assets, equity ratios, dividend payments and voting preference, ownership history, ownership intent and profile, liability, taxes, and balance sheet items. These items are usually specified in the Note to the Financial Statements. They may also be deduced by the use of certain additional financial reporting requirements specific to the US tax laws. Such items typically include: fair value of the security or equity contributed, method by which dividends are declared, borrowing and maturity dates, reserve for early payment and redemption, current and previous outstanding notes, capital expenditures, debt and other assets, and reinvestment activity. Additional reporting requirements may be required under state law.
The pro forma cap table thus provides a fundamental framework upon which to build the fundamental analysis needed for an investor to understand the relationship between the various types of ownership structures and the value of the company's common stock. The accounting principle of proportionality also plays an important role in the calculation of the cap ratio. Under proportionality, a cap on the value of the common stock will be equal to the weighted average of the total number of shares outstanding plus the total number of preferred or common shares outstanding. Another important principle of the pro forma cap table is that the purpose of the company's capital structure is to provide sufficient capital to allow it to actively invest in short term and long term assets, make investments that yield expected dividends, make purchases that repay debt and other obligations, and allow the investors to utilize their investment capital.
To arrive at a accurate valuation of the company's common stock, several complex accounting concepts must be examined and understood. startups are the historical performance of the company, its relative investment structure, the relationships among owners and managers, and the characteristics of the venture capital that fund the company. The first step in developing a reliable pro forma cap table is the preparation of a historical case study that evaluates the performance of similar companies in the same industry. The comparative study of these companies reveals important information about the characteristics of the company's business model and the manner in which management funds its operations and makes equity investments. startups is then possible to calculate the value of the company's common stock using a range of different measures of market capitalization, price to book ratio, dividend yield, weighted average net worth, free cash flow, and market cap.
Other necessary components of the pro forma cap table include the rounding off of percentage points to the nearest whole number, treating revenues and expenses as equal and subtracting the cost of capital from earnings, treating accounts receivable as cash and paying interest and principal at the end of the reporting period, treating accounts payable as cash and paying interest and principal at the end of the reporting period, treating gross margin as actual income and treating assets as cash. A spreadsheet, Excel spreadsheet or charts can be used to develop the pro forma cap table. In order to round off percentage points to one hundredths, use the rounding off option in the Insert button of the Report button. To determine the exact percentage points, use the Round option in the Select button. For calculating the exact values, divide the annualized revenues by the annualized costs and round the results to the nearest whole number.
The final step in the development of the pro forma cap table is to evaluate the financial strength of the company based on the information provided. If the company has significant investments in fixed assets, determine the potential value of those assets using the discounted cash flow method using the historical low, high, and medium price per shares to value the company. Investors may also want to consider using the other alternative valuation models such as the beta analysis, the intra-day trade index, or the forward looking forecasts method. Use the other tools available to investors as part of the research process.
Investing in a business requires accurate and reliable information. Using a pro forma cap table to develop the initial investment portfolio is an easy and reliable way to ensure that the financial statements are accurate. Investors can then apply their own set of strategies to the investment portfolio to maximize return. They can easily modify the spreadsheet to reflect new information or changes to the business today. For more information on how to use financial statements and Excel to develop a pro forma capitalization table, contact a commercial finance professional today.
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