Notes

Using a Waterfall Or Simple Cap Table Can Help Get Started on the Road to Business Success
startup is simply the mathematical equivalent of a real life business cap table. That is to say, it is a hypothetical representation of the numbers that would have been generated for any given business under the existing rules. In real terms, a cap table is a snapshot of all the financial metrics that would result in the value of a company if it were publicly traded. Unfortunately for most small businesses, a cap table is nothing more than a hypothetical framework within which to evaluate potential acquisitions, joint ventures, mergers and spin-offs. This means that unless all of the stakeholders are clearly and unambiguously committed to investing in the business, it is virtually impossible to successfully implement a significant strategic business decision within this simplified framework.

So, what is a simple cap table? Basically, startup is the mathematical equivalent of a real life business cap table - only much more simplified. Essentially, it is simply a series of mathematical equations in which you apply the various transaction terms to the overall cap table at the specific point of purchase to calculate the exact numbers that each investor and debt holder would be paid on any acquisition event of the business (e.g. an IPO, a acquisition or spin-off).

Obviously, given the need for a simplified framework in which to evaluate potential acquisitions and other key business decisions, the first step is to develop and employ a cap table template. A cap table template is essentially a spreadsheet or other piece of graphics that is used to conceptualize the ownership and investment relationship that would arise if the business were public. After developing and implementing the cap table template, a business can determine which entity holders would be collectively entitled to the specific shares of ownership as well as the precise proportionate percentages of ownership that would be held by each of such entity holders. This allows for a business to more effectively evaluate both the short and long term value of an IPO or acquisition prospect.

Now, back to the basics: how do you use the simple cap table to evaluate acquisition opportunities? The first step is to develop a simple cap table that presents the complete definition of each individual entity holder's equity. We then need to include two separate columns: one for the individual share holder and one for the entity share holder. This gives us the following simple calculation:

The total number of shares is always greater than or equal to the total number of entity shares owned. Therefore, we must calculate our discounted cash flows using a forward looking perspective. Forward looking projections are essentially estimates of future cash inflows assuming certain growth factors are assumed. These include a markup percentage applied to capital expenditures, an assumption about the timing of dividends or licensing payments and an assumption about the elasticity of capital costs - which essentially means the speed at which companies' assets will return to their owners.

Now that startup have our capital inflow and outflow, we can apply the simple cap table to various scenarios. First, we can simply multiply our current fair value by the current fair market value of each of our acquired entities. Second, we can use this same calculation to measure our early stage company equity. By doing so, we effectively eliminate the dilution factor associated with early stage company ownership. Also, we are not calculating diluted earnings as we would if we were diluting our existing ownership stake in the entity.

Most spreadsheets or calculators which provide basic cap tables for equity financing include default and premium percentages. Unfortunately, many financial spreadsheets omit dividend payments which significantly impacts valuation of an enterprise. startup are typically paid at the option price or fair value of a security underlying the stock. Thus, if startup were to use a waterfall analysis based on current and historical data we would obtain a better picture of how equity financing and dilution affect valuation of our total retained earnings.

A cap table template provides a simple way to obtain company value measurements. These templates help companies and people get started on the road to making a profit. We recommend using these tools every day. With a good cap table template, you can get started today.
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