Notes

How Can an Investor Use the Pro Forma Cap Table?
A pro forma cap table, also known as a shareholders statement, is a spreadsheet which calculates the capital structure of an enterprise at current and historical periods. The spreadsheet compares the net value of invested capital, current assets, current liabilities, equity and retained earnings of the enterprise. The spreadsheet simultaneously combines information about the enterprise's stakeholders to summarize the current ratio of assets to liabilities and the effect of dilution on the net value of the enterprise after such dilution. The spreadsheet is updated each year with the latest balance sheets and operating accounts of the enterprise.

Under the pro forma cap table, shareholders are shown by asset valuation the value of all Shares i.e. owner equity divided by the total number of shareholders. Shareholders are then ranked in order of decreasing value for their Shares. The asset value is determined by the total number of Shares outstanding plus the weighted average Shares per Share of those shares.

The third row in the pro forma cap table has the cash flow projection for each quarter of the investor's contract. This is calculated as the difference between the net income and the operating income less any financing charges. The financing column includes the financing options used by the investor and the effect of those choices on the investor's liquidity. The last two rows in the table list the dividends paid to shareholders and the effect on the shareholders return to shareholders as reflected by the dividends declared. The final row provides information about the Fund and its constituents.

The third and last row in the pro forma cap table compares the historical price per share of the Fund to the historical cost of capital. Once again, this is calculated as the difference between net income and the cost of capital less any applicable financing charges. When comparing the historical performance of Fund's securities to that of another fund it is important to note that since net income is less than the cost of capital this calculation will be less than the calculation of net income and capitalization (the latter is the later portion of the equation).

The fourth and last row in the table compares the percentages of total shares outstanding as well as the percentage of total shares owned by the individual Investors. The percentages are compared based on the current market conditions at the time of writing. The bottom two rows provide the definitions of the Fund as well as an explanation of how the calculations are made. While it is possible to prepare a more sophisticated version of the pro forma cap table utilizing other investment performance indicators it would take far too much time and effort for the small time investor to attempt to do so.

As an alternative to preparing the pro forma cap table using the Excel spreadsheet program, many entrepreneurs utilize a third party valuation resource available online. There are several such resources available ranging from other investment companies to professional venture capital firms. These resources generally allow the small business owner to input some personal data in order to generate a more sophisticated version of the Excel spreadsheet. One of the keys to the valuation process is that the valuation should be based on future income streams rather than on the performance of the company as of the date of the filing. If startup begins to experience significant earnings declines at the start of its operations it is very difficult to justify holding its shares despite the fact that the earnings decline may only be temporary.

Many entrepreneurs mistakenly believe that the purpose of preparing the Excel spreadsheet using the third party data source is to use a "rounding off" process once the value has been reached. In reality, as the investor nears the end of the range of shares available for purchase it is necessary to enter the rounding off point into the software program or into the cell above the spreadsheet in order to ensure that each round of calculating the EPS comes to the same number as the prior one. This results in a much more accurate picture of the profitability of the business and allows investors to make better investment decisions.

There are many different ways that an investor can use the pro forma cap table. The most common is to determine if there are any additional restrictions on the company's shares following the initial public offering. For example, it may have been discovered that the founder or current management may have actually taken part in an illegal stock market scheme. Investors need to be absolutely certain that these scenarios are completely avoided and that the shares of the business are not suddenly reduced to pennies following an event that would leave them with no ability to purchase additional units of stock.
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