Cap Table Modeling - What is it and Why Is It So Popular?
Cap Table modeling is a relatively new term in finance and is used when referring to equities that have a conversion component such as cash or marketable securities. It is a highly useful concept for all kinds of investors. For example, Cap Tables are often used by institutional investors as they make investments where they will receive a small return while also converting their return to fixed income. There are also some individual investors who use Cap Table modeling as it permits them to acquire a piece of stable fixed income and then invest part of that return as capital gains. This way they avoid paying capital gains taxes until the earnings are enough to cover taxes.
One of the advantages of Cap Table modeling is that it provides a way for the additional stakeholder, the vendor, to be rewarded for his or her efforts. The additional stakeholder is not typically a financial analyst on staff and should not expect the same level of compensation as the financial analyst. However, by being a vendor involved in a Cap Table, an investor can receive a generous return on his or her investment while avoiding the additional burden associated with providing an earnings stream. This is one reason why many company's have adopted the practice of concierge onboarding. Concierge onboarding means that the vendor, upon signing the agreement, provides the investor with performance related payments and options.
In the case of a capital raising round, many companies use cap table modeling. Capital raising is a routine that companies use in order to raise enough funds to satisfy their obligations. It also allows for some degree of creative financing by allowing companies to obtain access to funds even if they do not have sufficient credit or collateral to satisfy their obligations. The key to doing this is working with an underwriter who is experienced in working with both venture-capital and private equity groups.
Another advantage of Cap Table modeling is that it makes the sale of a startup more feasible. When working with an underwriter, he or she will likely use a multiple lender structure. The goal is to allow for the startup to raise a significant amount of capital through a few different lenders, with the hope that each lender offers a significant multiple-clerosis risk. Multiple-clerosis risk is a calculated risk based on the business's ability to profit on an initial public offering (IPO). When the startup receives an offer acceptable to more than one lender, there is a greater potential for investors to receive additional stakeholder benefits.
In addition to offering additional stakeholder benefits, investors will often receive convertible notes in the case of a successful financing round. A convertible note is essentially a loan agreement between the startup and one or two third-party financial institutions. The startup can sell the convertible notes to investors during the course of the capital raising process. The convertible notes will allow the startup to repay the financial institution if it is unable to successfully sell its equity during the term of the loan. Many companies have adopted the practice of convertible notes in their financing rounds.
Cap table modeling assumes that there is something went wrong while writing the application and that the company is unable to raise the funds. This may not necessarily be the case. It is important for entrepreneurs to understand that something may have happened when they were unable to meet the funding requirements for their business plan. In this scenario, it is best for them to contact the company's underwriter and request that the entire Cap table be withdrawn from the filing.
There are various reasons why startup founders may be unable to meet financing requirements. The most common reason is that they have not written a compelling business plan. If they did submit a compelling business plan, it may have contained enough information to qualify for a Seed investor. Seed investors provide the startup with some of their profits. Other Seed investors provide a combination of profits and investment in order to fund the company's future growth. In some cases, there may not be a Seed investor or there may be only one or two investors; therefore, there is not a Seed or an angel investor involved in the startup.
While convertible debt and equity capital are often the first funding sources for a company, they are not always the most reliable funding sources available. Therefore, cap tables must be written with a careful analysis of the startup's financials in order to identify viable options for funding. There are many alternative financing sources available, such as angel networks, venture capitalists, banks, leasing institutions, and other types of real estate lenders, but due diligence is absolutely essential in order to ensure that these alternatives will provide adequate capital for startup operations.
The last thing to do in order to model the cap table in a realistic way is to contact the underwriters. In order for a potential funding source to join the capital raising process, the underwriter must review the application for a potential offer. The underwriter will typically rely on the information provided by the founders and will make their determination based on the information provided. However, it is possible for the underwriter to look beyond the application, which can give rise to the possibility of missing key points on the application. The goal of pro-forma sheets is to provide accurate, clear information to the underwriters so that they can make a fair decision. In addition to making sure that the numbers add up and there is a good mix of startup and non-startup financing, the pro-forma sheets can also help provide additional protection should the underwriters determine that a loan need not be supported due to the inherent risks of private financing.
Cap table modeling is extremely useful for funding a startup and for identifying opportunities for convertible notes. Through the use of cap table modeling, business startups can identify their ideal funding source(s) early on in the startup process. This allows them to focus on finding the funding sources that are best for their company during this crucial time. In addition to helping businesses identify funding opportunities, cap table modeling can also provide valuable information to the management team when it comes to negotiating financing. Whether it is to satisfy investor requirements or to build a business future, pro-forma sheets are an essential component for many business funding transactions.