Notes

Using Cap Table Math to Determine the Dividend Date
"Cap Table Math" is an online game based on traditional mathematics with math skills required. It is a game developed by Melissa Kelly to teach kids various concepts and methods of calculating using addition, subtraction, multiplication, and division of numbers. At first glance, a cap table might seem very basic--and indeed it is, because most people do not really understand the subject. But, if you dig deeper, you will notice that the rules of the game are not really that difficult to understand.

"On the surface, a cap table math game is simply a set of easy-to-understand math problems. However, over time you learn that cap table math is driven by emotional and psychological softwares. This makes the game even more interesting to play and enjoyable to apply, since you feel a sense of accomplishment each time you successfully solve one of the problems. The challenges and the subsequent euphoria lead to further learning."

So how does this game end up being used to help kids solve problems in business and everyday life? The creators of the game have created a mechanism through which kids can indirectly learn about different ownership structures, contracts, inflation, distribution, and valuation. In other words, they are teaching the game through the medium of contract law, although they do include some pretty advanced calculus concepts. The way that they teach this through cap table math is with the help of a simple graphical program, which projects future sales and revenue based on current market prices and conditions as well as historical data.

One of the founders of Cap Table Management, Jason Tanis, explains it this way: "In the simplest terms, we believe that value comes from what someone else (i.e. a venture capitalist) is willing to pay for a share of ownership in a company. For us, the goal is to show kids that their dollars and cents add up in a very unique way - a unique way that few people understand." Mr. Tanis goes on to say that the founders had their "personal experience of being taken advantage of by the owners of large corporations" in mind when conceptualizing the game. What he believes we can achieve by learning to manage share ownership is "changing the way children think about money... We believe that this will inspire future generations to embrace capitalism as the best system for wealth creation... We believe that this will give them a fundamental understanding of the value of hard work and entrepreneurial enterprise." Learning to manage the ownership structure of the companies that use Cap Table Math is not something that you can just teach... you need to be taught by those who know it best.

One example of the game that can be applied to business is a mathematical concept called " Dilution". According to Mr. Tanis, "Dilution means that two or more companies' value is diminished from their purchase to the purchase price." To them, this equates to "a company's worth is diluted as a percent of the overall market cap." In other words, the fewer the percentage of shares outstanding, the less diluted a company's value becomes. Dilution can be an issue for venture capitalists when they are investing in a small company where the potential revenue stream is very small...

A common example of this is Cap Table Math's cliff date concept. startups is not specific to venture capital; however, it can be used to "determine" when it is time to dilute the ownership percentage. The cliff date is a number that is calculated based on current market cap, current dilution level and future EPS revisions. Determining this date is not only for the sake of investors, but also for the sake of employees.

In order to apply this concept to current Cap Table Investments, one must first determine the risk/reward ratio of the investment. The R/S ratio is derived by dividing current stockholders's equity in the business by the total number of shares outstanding. One can then calculate the annualized earnings per share (EPS) and discount rate using the formula: current stockholders' equity x (current EPS / current share count)". Dividing the annualized EPS by the current share count gives the maximum annual cap table investment amount.

Another way to use the cliff date concept is when looking at sample cap tables where there are already cash options invested and the option pool has already been depleted. The maximum loss per option will be the maximum loss per share on a particular stock or option. For instance, if 100 shares is owed to the investors and the option pool has been depleted, the investors will own only one-half of one percent of the total shares.
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