Capitalizing on Startup Businesses
A Capitalization Table, sometimes called a cap table, is a financial table giving an assessment of the percentages of ownership, total equity, and potential value of equity in any round of financing by owners, founders, and affiliates of a business. The size and number of investors present in capital table transactions may vary depending on the amount of capital for each round and the risk associated with that capital. Capital tables are extremely useful in situations where the total capital is critical to the success or failure of the business. In short, capital tables help to manage venture capital.
The most common types of capital tables are qualitative or waterfall. A qualitative capital table lists only the characteristics of the business and the overall amount of ownership by investors as well as the net effect of these characteristics after one year. This type of capital structure has long been used in the Valley because investors need to be provided with as much information as possible at the earliest stages of venture. However, the waterfall capital table is becoming less common as savvy entrepreneurs realize that shareholders often do not want to know the complete information at the early stages of venture.
The capital table allows for early stage data to be shared with owners by means of a table. However, a waterfall capital table does not provide information that can be used to calculate the exact value of shares. Therefore, the actual value of shares will not be known until the year end. This could be an embarrassing situation for the founder or company when they know that the share holdings by the founder have declined. Investors need to know the true value of shares at the start of the business rather than wait until later.
An accurate capital table must also show how ownership changes over time. For example, during the first five years of business the percentage of shares owned by employees is low while it is at its peak in the later years. This should be shown in the capital table along with the employee percentages. This is important as it will show if the companies assets or stock options are undervalued or overvalued due to the fact that the employee percentages are low.
The spreadsheet provided with capital markets should also have a fund balance sheet that shows the operating surplus or profits before expenses are taken out. This should be compared to the operating surplus or profits after expenses have been taken out. This is important as it will show if the companies cash flow is satisfactory. If the operating balance sheet is satisfactory it will allow investors to determine whether or not the company has enough funds to continue operating without having to take out any loans or equity. A company with a satisfactory operating balance sheet will likely receive positive recommendations from analysts.
The spreadsheet should also show the ratio of share outstanding to full time staff members. It is possible for a business to have an extremely high ratio of share outstanding to full time staff members but this is very rare. The higher the ratio is the better able the owners or the managers of the business will be able to attract and retain good employees.
One of the most important pieces of information on the cap table should be the ratio of total startup capital and total first year funding. If a business has a large seed money injection but very poor results it may have a difficult time attracting and retaining good employees. In some cases it can be easier to raise a larger round of venture capital if the results are more encouraging. startup s that receive only one or two rounds of VC funding have a much better chance of turning a profit and becoming profitable within the first year.
Capitalizing on startups requires careful analysis and detailed research. The details in the capital structure along with the business plan should be scrutinized and compared to other similar businesses to determine if it is appropriately financing a startup . This will enable managers to determine if it is making the best use of its available capital resources. Capitalizing on startups requires careful and well-planned decisions.