Notes

Options for Investors in the Cap Table Modeling Process
Cap table modeling is a popular method for small cap investors to buy and sell common equity, preferred stock or debt owed by borrowers to other creditors. Typically, lenders use cap table models in private placements, but they are now seeing an increasing number of institutions that are offering them as part of larger institutional offerings. Because they provide such a large number of advantages for investors, many institutional lenders have decided that they should include them as a part of their investment strategy for the total value of the assets held by the organization.

The concept of cap table modeling is not all that complicated. It is really just a method for investors to calculate the amount of return that they can expect from the sale of their debt to another investor. This calculation can be done using the yield to premium and time period values that institutions commonly use in making convertible notes, senior notes and other types of financing. For instance, the Tw 12 model for convertible notes requires the following information to be calculated: capital gain, capital expenditure, current and future income, current and long-term debt and assumption cost to buy equity. Investors can use all of these numbers to determine how much they will earn if they sell their convertible notes for a specified price on a particular date.

One of the reasons that institutional investors have decided to add cap table modeling to their own investment strategy is because it provides them with a good way to determine how well their own fundraising round is performing. The degree to which a fundraising round is successful or unsuccessful is one of the major factors that investors use to decide whether to participate in the round or not. Through the use of cap table modeling, institutional investors can evaluate their own fundraising rounds and find out what factors affect the amount of capital raised and the amount of profit that is earned by the venture during that fundraising round. In many cases, they will be able to identify areas that need improvement and make necessary changes to improve the performance of their venture.

Another reason that institutional investors have decided to add cap table modeling to their portfolio is because of the tremendous amount of time that it takes to successfully complete such a project. Typically, a successful fundraising project takes about three to six months from start to finish. By using an option grant from either an angel investor or a venture capital firm, an institutional investor can ensure that they have an additional stakeholder involved in the process at almost all times. When dealing with a third party, however, this additional stakeholder is not necessarily someone who is personally related to the investor. Instead, the investor may choose to invest in a company that has a significant market presence outside of their organization, such as Google or Twitter.

This flexibility allows institutional investors to invest in companies with little to no risk. They do not have to put up the entire capital amount up-front, which means that they can potentially increase their profits even faster. Investors who choose to participate in a cap table modeling exercise will receive a percentage (a commission) of the net proceeds from the sale of an option grant. In exchange for their services, they will be entitled to an expense reimbursement from the fund that covers the fees associated with their engagement. For instance, if an institutional investor were to acquire shares of stock from a private company that was valued at a very high point but has since dropped in price, they would not need to pay the fees required by the fund as a way of receiving their investment back. This advantage is one of the reasons that institutional investors have been able to take advantage of options grants and cap table modeling.

However, it should be noted that this advantage is not unique to private investors. Institutional investors who opt to participate in an option pool exercise will also be entitled to a fee that is paid on an annual basis. While this fee cannot be a large portion of the overall value of the option, it is still considered to be a cost by the firms that are participating in the pool. By opting to participate in a pro-forma fundraising campaign instead of waiting for the revenues to come in during the year, cap table models ensure that all investors in the fund are properly compensated for their investments. This ensures that all the funds collected during the year are used appropriately to cover the costs of investment.

The amount of time required to complete the entire investment activity is another advantage that institutional investors have enjoyed by participating in the option pool fundraiser. Instead of being forced to wait for the revenues to materialize during the year, cap table models make use of the option pool to solicit funds at the beginning of the fundraising year. This allows the companies that choose to participate in the model time their fundraising efforts at the beginning of the year, providing them with the time necessary to adequately solicit investments. Since most angel investors work with companies that they have an established relationship with, the process for determining which companies will invest their money in the fundraising campaign will be streamlined. The amount of time it takes for these firms to determine the investment status of a company is significantly reduced, which allows the fundraising team to focus on developing relationships and developing long-term relationships with companies that will invest in their organization.

Cap table modeling also provides investors with the ability to select a portfolio of companies that are suited to their investing strategy. Many startup companies do not have extensive experience when it comes to raising capital, so they are unable to locate companies that will invest in their organization based on their personal experience and investment philosophies. When participating in the option pool for a startup company, entrepreneurs can request lists of companies that they are interested in funding. With the help of a fundraising consultant, entrepreneurs can narrow down their options and develop a portfolio of companies that they are considering investing in.
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