Startup Business Funding - How To Use A Simple Cap Table To Value A Startup

A simple cap table is useful and beneficial for:

By making a simple cap table you are taking an accurate look at your organization's capital structure at present. This is in preparation of potential ownership dilution from various shareholders when going though several rounds of potential raising capital that inevitably will result in dilution of current shareholders. When looking at this type of capital structure you want to determine if you have a good case for future growth. You do this by looking at your cost of capital and your weighted average time to earn per year. (WAT.) Your cost of capital is simply your cost of doing business divided by your revenue.

For many organizations the numbers will look great once they have been put together in simple cap tables. However, it is important to be careful and not make the mistake of relying on these figures alone. Often, the numbers are the cherry on top of the sundae. If you want to be really prepared for potential dilution you need to put together a valuation of your organization in terms of dollars and cents and then use these numbers as part of the mix when looking at possible future financing.

A simple cap table for financing can show you two things. First, you can see your common stock and preferred stock ownership as separate entities. In many situations, these are not and it can impact your ability to fundraise. Second, you can see that your revenues appear much better than your expenses. (The reason is that you are basing your valuation on the amount of money that you expect to bring in versus the amount that you think you will spend.)

Now let's consider an option pool with a simple cap table. First, we will show how the stockholders of the company could change the balance sheet and therefore change the liquidity event. You can do this by simply adding more options to the list. An option pool will usually consist of common stock and preferred stock. Add all of the options that the stockholders of the company can legally add to their common stock or preferred stock ownership and then calculate the net effect. This will give you an idea of what effect the addition of new stock will have on liquidity.

There are some startups that are considered small or medium sized but they have the potential to become big very quickly. The thing that many investors don't realize is that startups can have large problems if they don't raise enough capital early on. These capitalization tables can help you understand the financial situation of a startup and help you set-up goals and objectives for fundraising. If a startup is successful they can raise a lot of venture capital, but if they fail there could be some very large financial losses. Therefore it is critical for startups to use capitalization tables to track their growth and determine their chances of success based on their past and future revenue potential.

Fundamentally, there are two types of valuation tools used in the C.O.G. market; cash flow valuation and the waterfall analysis. When dealing with startups you should try to include both of these valuation methods because each has advantages and disadvantages. In most cases the use of cash flow valuation is more accurate because it takes into account the immediate and long-term cash flows of the business and can adjust for fluctuating financing costs. However, the C.O.G. method which compares the current value of the business to its price at the time of the listing is less accurate and tends to favor businesses with significant assets.

On the other hand, the waterfall method compares the current value of the business to its fair market value using the historical price and assuming no additional dilution occurs over the course of future financing. Using either method can give the startup a better idea of the current value and future realized earnings. The simple cap table will help founders and new funding round winners identify companies that have the potential to dilute their equity. This will allow them to make a more informed decision when making a decision about funding.