Pro Forma Cap Table
Startups begin with unique ideas and make it through innovative thinking, hard work, and all the other hurdles. They eventually achieve traction leading to maturity. One of the important elements in a company’s evolution is developing and managing the shares through a suitable pro forma cap table. It might be hard for newcomers in the business world to make a cap table without the proper knowledge at their disposal.
A cap table is a table that shows an analysis of the company’s ownership percentage, the value of the equity, and equity dilution. Cap tables are essential as they tell you who owns how much of the business, help make significant decisions, and affect the price of future fundraising series. This checklist contains all relevant information that will help the owners manage and understand their resources resulting in growth. The cap table’s main users other than founders and owners are investors, venture capital firms, key employees who hold equity stakes, angel investors, and executives. Companies should utilize this tool as it aids the financial decision process regarding the market value, market capitalization, and equity ownership. Additionally, private companies can also use this to maintain their market value.
Investing is a risky process but investors do so by alleviating the risks while increasing their chances of success. They use the pro forma cap table to assess the business ownership and how the management’s decisions will affect it. Before we understand how to make one we need to understand what a pro forma cap table is.
Pro Forma Cap Table
A pro forma cap table is a spreadsheet that shows the capital structure of a business at present and after a potential investment. The spreadsheet combines data of the company to summarize the percentage that investors own, the value of their holdings, and the dilution over time. The pro forma cap table is used by different users such as investors and management for making major investment decisions.
What is a pro forma cap table?
A pro forma cap table is a spreadsheet document that displays the ownership specifics in detail. It is generally made for early ventures and startups, listing all the securities of the company, including the warrants, authorized shares, preferred shares, common shares, the owners of the shares, and the price paid by an investor for the shares. Cap tables are shown as a summarized display sheet of the current financial term. Investors use the cap table to determine the dilution of their ownership percentage over the funding rounds.
Investors also use the pro forma cap table to quantify potential profits in different exit situations based on the estimated returns. Also, in a given scenario where the company is sold, Investors can evaluate the probable allocations of returns. The spreadsheet shows the information in one place, the tools available in the cap table, and captures the main variables that impact the investment. Additionally, it helps to quantify different possibilities with different viable outcomes. For an investor, this information gives an insight that assists in negotiating investments effectively.
Here we summarize the details in a table:
| Purpose | Enables stakeholders to foresee potential changes in their ownership stakes due to anticipated events. Assists in negotiating better terms with investors by providing visibility into post-financing dilution. It helps companies devise equity compensation strategies by projecting the impact of new option pools. |
| Contents | Lists all equity securities, including shares, options, warrants, and convertible instruments. Shows current and projected ownership percentages for each stakeholder category. Displays the value of each stakeholder's holdings based on the projected post-event valuation. |
| Key Differences from Standard Cap Table | The standard cap table reflects the current ownership structure. The pro forma cap table models the capital structure after a specific future event or scenario. Allows inputting assumptions like financing amount, share price, new securities issued, etc. |
| Benefits | Provides a comprehensive view of post-event equity distribution among founders, investors, and employees. Enables data-driven decision-making by visualizing the impact of various financing scenarios. Facilitates setting accurate expectations with stakeholders before finalizing deals. |
Why are pro forma cap tables used?
A cap table is an important tool for owners and investors as it provides detailed insights into the business’s ownership. Investors use pro forma cap tables for many purposes; some of them are:
- Firm To Be Sold – When the owners decide to sell the firm, the proceeds after debt will be distributed amongst the shareholders. The pro forma cap table will give all details about the proceeds proportion distribution. This is shared with all the shareholders to reduce the chances of any disagreement.
- Future Plans – The pro forma cap table shows the vital dates at which the investor can convert their warrants, options, and bonds to shares alongside the business’s present investors and shareholders. As an owner, this has an impact on the company’s future plans.
- Financing – The first thing investors are interested in is the ownership structure of the company. Investors will see the current makeup rate, previous finance rounds, and its effects. Additionally, they check how the finance affected the shareholdings. For existing shareholders, the pro forma cap table will show the current standings and how to increase them throughout the investment.
- Legal Documents – The cap table not only keeps a record of all shares but also of the legal documentation that supports them. The company can use this to verify all legal forms. Investors can also use the pro forma cap table as a resource to track their vital legal documentation.
- Ownership Data – A pro forma cap table is the best way to track shareholders’ information, such as the percentage of the company that investors own, no. of shares sold, etc. Information such as the vesting schedule will be available when new shares are to be issued. The cap table is required to be updated regularly, especially if the company is going through multiple transactions.
Example of Pro Forma Cap Table
Tech Pro Inc. is a software company delivering products that seamlessly integrate into everyday life, enhancing productivity, efficiency, and overall user experience.
Here’s a simple pro forma cap table for the company that includes the ownership structure before the funding round.
| Shareholders | Role | Common Shares | Seed - Preferred Shares | Options | Warrant | Total shares | Ownership% | Capital |
|---|---|---|---|---|---|---|---|---|
| Jessica Stewart | Co-Founder | 500,000 | 500,000 | 12.50% | $50 | |||
| Edward William | Co-Founder | 2,700,000 | 2,700,000 | 67.50% | $270 | |||
| Clara John | Advisor | 50,000 | 10,000 | 60,000 | 1.50% | $150,000 | ||
| Steve Mark | Advisor | 10,000 | 10,000 | 0.25% | $30,000 | |||
| Louis Richard | Advisor | 30,000 | 15,000 | 45,000 | 1.13% | $3 | ||
| Ashley James | Advisor | 10,000 | 20,000 | 30,000 | 0.75% | $1 | ||
| Bella Michael | Investor | 50,000 | 25,000 | 75,000 | 1.88% | $150,000 | ||
| Peter Anderson | Investor | 30,000 | 30,000 | 0.75% | $90,000 | |||
| Peter Henry | Employee | 150,000 | 150,000 | 3.75% | $15 | |||
| Jones Blaze | Employee | 50,000 | 10,000 | 60,000 | 1.50% | $150,000 | ||
| Robert Lee | Employee | 150,000 | 150,000 | 3.75% | $15 | |||
| Bill Todd | Employee | 150,000 | 150,000 | 3.75% | $15 | |||
| James Smith | Employee | 15,000 | 5,000 | 20,000 | 0.50% | $2 | ||
| Anderson Hooper | Investor | 20,000 | 20,000 | 0.50% | $60,000 | |||
| Shares available for issuance under the plan | 40,000 | |||||||
| Total shares Issued | 3,705,000 | 210,000 | 60,000 | 25,000 | 4,000,000 | 100.00% | $630,371 | |
| Price per share | $0.00 | $3.00 |
After developing their products, they were able to secure Series A funding from investors to expand their market.
| Pre- Money Valuation | Post- Money Valuation | ||
|---|---|---|---|
| Company Value | $20,000,000 | Company Value | $22,500,000 |
| Number of Shares | 4,000,000 | Number of Shares | 4,500,000 |
The company then decided to take on its initial investment in the form of a Series A funding round, from investors. The total amount of the investment was $2.5 million to support the company to develop its product and expand its market. With this investment, the price per share paid by the venture capitalist was $5.00 per share.
| Investment Amount | $2,500,000 |
| Price Per Share | $5.00 |
| Number of Shares | 500,000 |
The pro forma cap table of the company after the funding round.
| Shareholders | Role | Common Shares | Seed -Preferred Shares | Series A -Preferred Shares | Options | Warrant | Total shares | Ownership% | Capital |
|---|---|---|---|---|---|---|---|---|---|
| Jessica Stewart | Co-Founder | 500,000 | 500,000 | 11.11% | $50 | ||||
| Edward William | Co-Founder | 2,700,000 | 2,700,000 | 60.00% | $270 | ||||
| Clara John | Advisor | 50,000 | 10,000 | 10,000 | 70,000 | 1.56% | $200,000 | ||
| Steve Mark | Advisor | 10,000 | 10,000 | 0.22% | $30,000 | ||||
| Louis Richard | Advisor | 30,000 | 10,000 | 15,000 | 55,000 | 1.22% | $50,003 | ||
| Ashley James | Advisor | 10,000 | 20,000 | 30,000 | 0.67% | $1 | |||
| Bella Michael | Investor | 50,000 | 150,000 | 25,000 | 225,000 | 5.00% | $900,000 | ||
| Peter Anderson | Investor | 30,000 | 145,000 | 175,000 | 3.89% | $815,000 | |||
| Peter Henry | Employee | 150,000 | 30,000 | 180,000 | 4.00% | $150,015 | |||
| Jones Blaze | Employee | 50,000 | 10,000 | 60,000 | 1.33% | $150,000 | |||
| Robert Lee | Employee | 150,000 | 150,000 | 3.33% | $15 | ||||
| Bill Todd | Employee | 150,000 | 150,000 | 3.33% | $15 | ||||
| James Smith | Employee | 15,000 | 5,000 | 20,000 | 0.44% | $2 | |||
| Anderson Hooper | Investor | 20,000 | 155,000 | 175,000 | 3.89% | $835,000 | |||
| Shares available for issuance under the plan | 40,000 | ||||||||
| Total shares Issued | 3,705,000 | 210,000 | 500,000 | 60,000 | 25,000 | 4,500,000 | 100.00% | $3,130,371 | |
| Price per share | $0.00 | $3.00 | $5.00 |
How to create a pro forma cap table?
It is essential to evaluate a company in the right way. Everyone involved in the valuation, such as the investors, accountants, lawyers, and financial analysts, must be on an equal level. This should be done before closing any transaction that consists of equity financing. If the company is valued incorrectly, it will have a drastic impact on the exit of the business in future years. Here are some things to keep in mind while creating the cap table.
#1 Use The Help of a Professional
Creating a cap table might seem like an easy task if you have the knowledge and skills. But there are some things that only a professional can notice and help you with while creating the table. Like, on the Pro-forma cap table, an accountant can only help you spot out inaccuracies and simplify the table for you and your investors. A lawyer will only help in ensuring that distinctions are kept with the supporting financial documents. They also make sure that investors do not waive the note’s interests and all the PPS of each round is in the same document. In turn, all this information will help potential future investors determine their preferred exit plan if they choose to invest.
#2 Evaluate the company correctly
Many startups tend to undervalue their company and make a deal without properly evaluating their company. Striking a deal just because it looks good is not the right thing to do. The valuation of your business should be done in an excel sheet and not in your mind. There are many times you evaluate the company in your mind at a certain amount but it is not correct. This is because many factors affect the evaluation of the business such as the location of the business, industry, customer concentration, management team, growth potential, reputation, competitive advantage, and earning history. So why gamble your company away? Better practice the pro capita cap table before going forward.
#3 Correct Numbers
When looking at numbers from closing a deal perspective, valuation does not depend on the customer base strength, the capital expense outlined for the future, the value of the company’s intellectual property, or even the predicted profits. While financing from venture capital, the valuation is mainly focused on the pro forma cap table. All the numbers on the sheet have to be reconciled and to be added up correctly as it represents the potential follow-up investment by an investor. If the numbers are incorrect on the cap table then the investor can lose money.
#4 Do not Evaluate the Business based on Ownership
While many companies start to prepare for finance, they focus on maintaining their existing shareholders’ percentage of ownership. The basis of finance for the company should never be on the percentage of ownership, as it does not dictate the amount of finance needed. It is a bad idea to do so as using it will restrict the company’s ability to regulate the number of shares issued. Every time a company decides to get financed, they will have to re-calculate the shares issued and price them again. This would lead to a higher number of authorized shares to maintain ownership, irrespective of the amount of finance needed. The number of authorized shares also affects the tax the business has to pay.
#5 Consider the Convertible Securities & its effects on the Pro Forma Cap table
One important thing to look at while creating a pro forma cap table is the convertible notes. If there are any capped or discounted convertibles, it will affect the financing round’s price per share. In an investor’s exit plan, the price per share is an important factor. If there is a finance round where the shares sold to investor A is for $2 and the same share is sold to investor B for $1.5, this detail should be mentioned in the cap table. If it is not mentioned, investor B can have an unfair advantage over investor A while exiting. Additionally, since it is an essential part of the calculation for the investor’s exit plan, all the convertible security documents should be shown to reflect the price.
#6 Amounts
The difference in the wired amount and the investment amount can often confuse people and they might think that the calculation is wrong. In the pro forma cap table, there is a difference in the investment figure and the agreed figure.
For example, In the financing round, Investor X agreed to give $20 for PPS $0.6; they should have 33.6 shares. Since there is no partition of a share, the company will round up the number of shares that the investor will buy, which will be 33. Now the total amount the investor X pays will be 33 multiplied by 0.6, which equals $19.8. So even if the investor agreed to invest $20, the amount he will send would be $19.8. All these amounts should be understood and reconciled to ensure no mistakes in the calculations.
#7 Shares Rounding
While calculating the number of shares in the pro forma cap table, there will always be the question of whether to round up the shares or round down. This happens due to the calculation of percentages to figures; if an investor has agreed to buy 100.2 shares, they would not be able to buy the 0.2 share as it is not viable. The amount is derived by dividing the amount to be invested by the price per share. No company will give out a fraction of a share, and this is why the numbers in the cap table will have to be rounded to a whole figure. Depending on the financing transactional documents, the rounding will be done according to the investors’ preference.
Even if it is a small figure, rounding up shares will increase the investors’ equity issued by the company. One other thing to acknowledge is that in an excel spreadsheet where the pro forma cap table will be prepared, any decimal point will be automatically rounded. So while entering the amounts, if there is any difference in rounding, edit the cell where the amount is different by going to the home tab and click on the number, then change the decimal point to the desired place.
Key Components for Pro Forma Cap Table
A forward-looking projection that models a company’s equity ownership structure after a future event like a funding round or issuing new securities is called a pro forma cap table.
The key components of a pro forma cap table are:
| Existing Securities | Lists all current equity securities - common stock, preferred stock, options, warrants, convertible notes, etc. Shows the number of shares/units and holders for each existing security. |
| Assumptions for Future Events | Inputs for the anticipated event include the funding amount to be raised, the new security type, pricing, etc. Allows modeling different scenarios by varying the assumptions. |
| Projected Ownership | Calculates new securities that will be issued based on the event assumptions. Shows updated outstanding share capital and ownership percentages post-event. Displays the value of each stakeholder's holdings based on the projected new valuation. |
| Dilution Impact | Illustrates how the new issue will dilute existing shareholders' ownership stakes. Enables negotiating fair terms by visualizing dilution for current investors/employees. |
| Employee Stock Options | Models impact of creating new option pools for employee compensation. Accounts for future option exercises impacting the ownership structure. |
The pro forma cap table dynamically models the effects of various assumptions related to future financing events or strategic decisions. This allows companies and investors to analyze the resulting capital structure and make informed decisions while setting accurate expectations among stakeholders.
Create a Pro Forma Cap Table on Eqvista
There are companies that use spreadsheets to create the cap table, to show the cap table in an organized order. But the chances of human error are still there. Here is a simple way to create a pro forma cap table step by step on Eqvista. The user-friendly interface makes it easier to do so. The information you will need to make the cap table is:
- Authorized shares
- Issued shares
- Investors & shareholders details
- Founders details
- Stock Options
- Convertible Shares
- Preferred & Common Shares
- Shares reserved for stock option plan
Note: The company information used below is of a fictional company and used for the purpose of this example.
Here is how to create a pro forma cap table using Eqvista
Step 1: Login or Create an Account on Eqvista
The first step is to login to the Eqvista website. Once on the website, you need to click on a new company to start the process of creating a cap table.
Step 2: Fill in the Company details
Once you have logged in and selected a new company you will be required to fill in the information of your company or the company you are going to invest in.
Step 3: Fill in the share details
The total shares authorized and the per value share when the company was incorporated should be entered below.
Step 4: Fill in the Founders information
If you are the founder of the company fill in your details, if not then you will be required to enter the founder’s details in. Every founder in the company should be mentioned, try not to omit anyone in order to get the right cap table.
Step 5: Fill in the shareholder’s details
Once you have entered the founder’s information, click continue. You will be then brought to a dashboard showing an overview about the founder’s details that you have just filled in.
Now you need to click on the shareholder’s option on the left and fill in the shareholder’s information such as their name and type of shareholder.
Once you have filled in the names and type of the shareholders click save and move on to the next step which is to enter the number of shares they own.
Step 6: Click on securities and choose the type of shares that the shareholders own.
Once you have clicked on the securities option to the left, a number of options will be given. You will have to choose the type of shares that the company has issued. In this example, it is Series B preferred shares.
Now you will have to fill in the information regarding the funding rounds by clicking on create a new class. Once you have selected Preferred, you will be asked to input the following information: class name, pre-money valuation, conversion rate, and liquidity preference. Fill in all the details and then click on “Submit”.
After you choose the type of equity fill in the class name of the funding round and click submit. You are taken to the next page where you can now begin the process of issuing shares by clicking “Add New Grant”.
Once you click submit you will have to add the shareholders and the number of shares they own. To do so, click on the funding round, in this case we choose Series B.
You will then be required to fill in the information about the shareholder. First choose the shareholder that you will fill in the details of, then fill out the number of shares issued, price per shares, date of issuance, and other details. And click submit. You can repeat this step to add more grants.
Step 7: Cap table details
Once you have done the above steps select the cap table on the left of the page. Here you can see all details of the cap table and the cap table itself. Everything you need will be available in one click.
The pro forma cap table shows you how your investment will impact the company. To see the impact it has, you can add your investment to this after all the details of the company have been entered. Once you have done that enter the details of the investment you want to do and come back to the cap table to see its impact on the company. You can also see an overview on the dashboard option.
As an investor or an owner, while you create a pro forma cap table, remember to make sure all the amounts are right and reconciled as wrong figures will affect you in different ways. Cap table for startups is essential as it shows important data in an instant with supporting documents, saving you time. Additionally, cap table management is as important, as over time, investors change and the prices of shares also change. Keeping them updated will help investors in their exit plan, and owners look for the right investors for finance.
FAQs
Here we added some frequently asked questions of Pro forma Cap Table:
How often should a pro forma cap table be updated?
A pro forma cap table should be updated frequently, especially when significant changes occur to the company’s capital structure or ownership. By keeping the pro forma cap table up-to-date, companies can leverage it as a vital planning tool for equity management and investor communications. An outdated pro forma provides limited value.
Can a pro forma cap table be used for tax planning purposes?
No, a pro forma cap table cannot be directly used for tax planning purposes. It is a forward-looking projection of a company’s ownership structure after a potential equity event like a funding round or share issuance.
What tools can help automate the creation of a pro forma cap table?
Eqvista provides an online pro forma cap table template that calculates share distributions, valuations, and investor equity based on user inputs. This allows companies and investors to efficiently analyze the projected ownership impacts of potential funding rounds or other equity events.
What role does a pro forma cap table play in fundraising rounds?
Pro forma cap tables provide transparency to all parties involved in a fundraising round. Their ability to forecast equity impacts allows informed decision-making and helps align expectations between companies and investors during fundraising negotiations.
CREATE YOUR PRO FORMA CAP TABLE ON EQVISTA
The pro forma cap table lets you visualize the company’s capital structure after the financing event. It aids in negotiating fair terms by clearly illustrating the resulting dilution for existing shareholders. Regularly updating the pro forma model is crucial as your startup progresses through various funding rounds, giving you the confidence to make informed decisions.
By using Eqvista’s pro forma cap table, companies can visualize dilution effects, set accurate expectations with stakeholders before deals, and make informed decisions during fundraising and strategic planning based on the projected ownership changes. Eqvista provides software solutions enabling the creation and analysis of dynamic pro forma cap table projections, a critical functionality for startups navigating the fundraising process. Reach out to us to know more!
