Notes

Using Microsoft Excel to Create a Pro Forma Cap Table
A pro forma cap table, sometimes also known as a funded proposals, is a financial spreadsheet which predicts the cap and dividend payment results of a proposed business investment. The spreadsheet synthesizes financial information from the owner's point of view to simplify the complex calculations that would be required by an accountant. The purpose of such financial statements is to allow investors to evaluate the value of a company based on publicly available information without needing to hire a professional. The investment proposals are then converted into shares of stock and priced at the current market price. This is the primary attraction of this type of financial product, since it simplifies an investor's job to understand the economics of a proposed business investment.

Most private shareholders cannot make reliable predictions about the economy. This reason alone keeps private shareholders from buying shares on an aggressive basis during the initial phases of growth of a company. The limited ability of shareholders to accurately assess company growth often leads them to choose shares that offer the highest potential dividend yield. If such investor wants to buy enough shares to cover their annual expenses, they will eventually sell their shares for a profit.

Private shareholders may also use a pro forma cap table or a funded proposal spreadsheet to understand the valuation of a company before making any venture capital financing decisions. This can help them choose the optimal number of shares to purchase from their preferred startup. Investors should not rely solely on the guidance of an accountant, since the accounting methodologies of most venture capital firms change frequently. For instance, a recent study showed that the most common accounting method used by venture capitalists is outdated, resulting in incorrect valuation estimates for some companies.

An investor will usually create a pro forma cap table using one of several common formulas, which are based on the fundamental economics of supply and demand. These formulas typically assume that startup companies have capital available and that entrepreneurs plan to quickly raise additional funds. These models typically fail to account for certain funding scenarios, such as the potential difficulty of raising additional venture capital during early stages of a company's development. Formulas that are based on fundamental economics tend to undervalue the value of common shares and underestimate the value of options and warrants, particularly if startup companies do not expect to quickly obtain other forms of traditional financing.

A pro forma cap table should be customized to take into account various funding sources that a startup might utilize. Common options include working capital loans from banks, angel investors, and third party investors. Since these sources typically have lower interest rates and financing terms than venture capital firms, they can provide a significant increase in a company's liquidity. Entrepreneurs should also consider using their own funds or borrowing money from friends and family. However, it should be noted that borrowing from friends and family typically has a negative impact on a company's liquidity because entrepreneurs tend to rely on their own wealth to fund their ventures.

When looking at pro forma cap tables, it is important to keep in mind that they assume cash is readily available to fund startups . However, it should also be kept in mind that there are many instances where startups may incur expensive expenses before being able to complete their business plan. In addition, companies sometimes face unusual difficulties, such as shortening launch schedules in order to reduce costs associated with launching their products. In these cases, entrepreneurs need to obtain capital from third party sources in order to cover upfront costs and continue manufacturing their products. In order to properly use a cap table, startups should evaluate all of their funding options, including both private and public sources of capital.

While using a pro forma cap table can provide entrepreneurs with a useful starting point when determining the numbers that they need to raise for their companies, it is equally important to understand the limitations of such a format. As an investor, you should never compare the amount raised on one sheet of paper with the results of calculations performed on another sheet. Instead, it is essential that you compare the rounded values, which will represent future profits for the company, to the actual dollar amounts that were raised during the term of the financing. To make this comparison, Excel has created a helpful tool that will allow you to compare the results of your round robin spreadsheet to those of other Excel spreadsheets that use the rounding to represent dollars.

In addition to calculating the potential amount of money needed to launch your business, it is important to determine the profitability of your company. This can be accomplished by understanding two factors: cost per transaction (CPC) and gross profit. The easiest way to create a pro forma cap table, then, is to include both figures in the startup's funding requirements. In the event that your calculations indicate that investors would be unwilling to finance your company, it is important to identify why they may not be willing to do so. To do this, it is imperative that you create a separate table for startup capital requirements and venture capital funds as well as provide a formula for determining the amount needed to raise a certain amount of venture capital. By following these steps, you can create a pro forma cap table that accurately reflects the financial needs of all forms of startups.
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