Cap Table Modeling in Private Placements

startups modeling is often used when banks are looking to deal with troubled loans. These are often unsecured loans that have not been given closing loans yet. They are usually short term loans meant to tide over a troubled loan in order for the bank to start the foreclosure process. However, as is often the case when things go awry, they end up becoming unsecured and thus they become the target of a cap table. This is where a cap table broker comes into play. This article will explain how a cap table broker works.

One method of cap table modeling is called the "additional stakeholder financing". With startups , you essentially model out how all future cap table financing rounds would affect your cap table now. A useful YouTube video by a certain Mark Thompson explains all aspects of this modeling easily. This is basically a new way of thinking about the cap table as an entity separate from the bank and its inherent problems and obligations.

Another model for cap table modeling is the "additional stakeholder financing" model. In this model, you essentially add on to what the bank itself already has committed to paying and in return you gain a share of their profits. The most common scenario in this scenario is for an investment bank to buy up many different cap table and option grants. startups issue many additional shares of stock to all the investors under their contract.

The "additional stakeholder financing" model works best when you are looking at the cap table modeling for startup companies. These are typically young companies (under $1B) looking for some fast growth opportunities. As their company grows and begins to generate revenue, they can then issue more option grants and equity to potential stakeholders. startups to this scenario is that the company is diluting their own capital in the initial round. This dilution can result in lower liquidity and also greatly impact the company's ability to raise additional financing in the future.

For instance, suppose you are working with an investment bank that specializes in deal placements and you are advising their investment bank on two different deals. One deal is a real estate deal that will produce annual proceeds of six hundred thousand dollars in cash flow. The second deal involved an investor which represents one of the first round of investors which invested six hundred thousand dollars in the company. Assuming both deals were closed and the six figures came out correctly in the investment rounds, your bank is going to issue twelve million dollars in stock.

You don't want to issue this stock to any of the first investors because you will be losing money on both deals. So what you do is focus on the second deal which is valued at only one third of the valuation of the first deal due to the lack of liquidity. You issue a one dollar cap on the stock due to the fact that the company has only sold a portion of its equity into the company and you believe the rest of the investors will quickly sell off their shares of stock when the price goes up. In order to make this valuation you have to use the waterfall method with the cap table so as to give the impression that the company is valued at a lower amount due to the diluted number of stock shares issued versus the original number of shares which was issued.

In startups might find yourself in a situation where there was an option grant application made and the Startup was declined. In this case you need to know how the investor who was rejected actually perceived the value of the startup at that point. If they saw additional stakeholder benefit from the startup being sold off they would be more inclined to go along with it. But in most cases this additional stakeholder should come from the investors who made an option investment in the first place. So if you want to have additional stakeholder you must include them in the cap table as well.

You must also consider that most companies that are looking to raise funding do not issue any equity and therefore they do not have a dilutive value compared to other businesses. The cap table in this scenario represents liquidation preference which is the percentage of shares you can pay out of your own funds as opposed to the dilutive value of your equity. You must determine if your potential funding source will be willing to purchase the additional shares at a discounted price and then add that into the waterfall for your valuation.