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A pro forma cap table, commonly known as a pro forma capitalization table, is a projected description of a business's ownership structure. In addition, it delivers a picture of the company's equity system after any financial event or activity, such as an acquisition, funding round, or stock option issuance.
Besides, many businesses use pro forma cap tables to predict future equity right, compute the dilution of existing shareholders, plan for prospective fundraising rounds, and decide the company's worth for valuation purposes.
What is a Pro Forma Cap Table?
A pro forma cap table is a fundamental instrument that allows investors and entrepreneurs to envision the future ownership structure of a business after an investment round or other equity event. It evaluates the current ownership structure and predicts the transitions after the event.
Furthermore, the pro forma cap table offers a thorough picture of a company's equity ownership, including the number of shares due, the portion of ownership maintained by each shareholder, and the worth of each share. This data is crucial for investors, entrepreneurs, and potential investors to comprehend the company's equity structure, how equity is allocated, and how much each shareholder holds.
Importance of a Pro Forma Cap Table
A pro forma cap table is significant for investors and startups because it delivers a clear insight into the equity structure of a company and how equity is allocated among diverse stakeholders. These details are necessary for negotiating equity values and defining the value of a company. Besides, a pro forma cap table also offers a foundation for future equity investment rounds, allowing investors and entrepreneurs to understand how future equity events will affect the business's equity structure.
Additionally, it can assist entrepreneurs in determining potential ownership and equity issues that must be handled before a future equity event happens. In addition, it helps private companies, startups, and investors to:
- Evaluate the effect of equity raises on the ownership structure of the business.
- Assess the ownership structure of a business after a merger or acquisition.
- Examine the possible dilution of ownership for present shareholders.
- Decide the possible ownership structure of a business after an investment round.
Primary Components of a Pro Forma Cap Table
A pro forma cap table generally incorporates the following components:
- Total Ownership: The business's total ownership, expressed as a share, is computed by dividing the number of overdue shares by the fully-diluted shares.
- Stock Options and Warrants: Stock options and warrants are the privileges to purchase shares in the future at a predetermined rate. They are generally offered to directors, employees, and consultants as part of their remuneration packages.
- Common Shares: Common shares represent the ownership interest of the public shareholders in the company.
- Issued and Overdue Shares: The total number of shares that have been assigned by the company and are currently owed.
- Preferred Shares: Preferred shares represent the company's chosen shareholders' ownership interest. Preferred shares normally have more profitable terms than general shares, such as priority in settling dividends or liquidation choice.
- Convertible Notes: Convertible notes are debt tools that can be converted into equity later. They are usually used as a way for early-stage businesses to raise capital without issuing equity.
How to Create a Pro Forma Cap Table
To create a pro forma cap table, you must follow the steps below:
Step 1: Understanding the Existing Cap Table
The primary step in making a pro forma cap table is comprehending the company's existing ownership structure. In addition, a current cap table should incorporate the following details:
- Names of the shareholders of the business.
- The ratio of ownership of each shareholder.
- The number of shares that each shareholder holds.
- Type of shares held by each shareholder (e.g., preferred shares, common shares).
Step 2: Comprehending the Financial Event
The next step in creating a pro forma cap table is to understand the financial event that is being projected. For instance, if the pro forma cap table is being created for an equity raise, then the following data should be known:
- The number of shares being issued.
- Amount of money being raised.
- Cost per share.
- Terms of the investment round (e.g., preferred shares, convertible debt).
Step 3: Forecasting the Effect of the Financial Event on the Ownership Structure
The third step in making a pro forma cap table is to project the effect of the financial event on the business's ownership structure. It comprises the following:
- Defining the ownership share of each shareholder after the economic event.
- Adding the new shares allocated during the financial event to the cap table.
- Evaluating the dilution of ownership for current shareholders.
Step 4: Adding Extra Information to the Pro Forma Cap Table
The fourth step in making a pro forma cap table is to add extra information, such as:
- Warrants and other rights to buy shares.
- Option pools and outstanding alternatives.
- Vesting schedules for options and limited stock units.
Step 5: Checking and Modifying the Pro Forma Cap Table
The last step in making a pro forma cap table is to examine and modify it to guarantee that it accurately mirrors the company's ownership structure after the monetary event. It is necessary to ensure that the pro forma cap table is compatible with the financial forecasts and the inferences made during the table creation.
How to Analyze a Pro Forma Cap Table
Analyzing a pro forma cap table needs understanding a company's equity structure and the effect of financial events on the equity structure. The following are some essential metrics to evaluate when interpreting a pro forma cap table:
- Valuation: Pro forma cap tables can define a business's valuation by dividing the number of due shares by the business's total equity value.
- Dilution: Dilution refers to the decrease in the ownership portion of current shareholders due to new shares being allocated. Moreover, pro forma cap tables can also calculate existing shareholders' dilution after an investment round or other financial event.
- Ownership Concentration: Pro forma cap tables can be used to evaluate the ownership concentration of a business, which is the share of ownership controlled by the largest shareholders.
- Shares Outstanding: The number of shares of stock that have been allocated and are presently owned by shareholders.
- Pro Forma: Pro forma refers to a projection or model of financial data based on specific premises. A pro forma cap table predicts the company's ownership structure after a speculative event, such as an equity investment round.
- Shareholder Equity: The total equity that shareholders own in a firm. It is estimated as the business's total assets less its total liabilities.
- Fully Diluted Shares: The number of shares that would be outstanding if all potential warrants and options were exercised.
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