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A pro forma cap table can be used by investors to analyze and compare their investments. The pro forma cap table shows the current financial information of an enterprise along with potentials in the industry. Investors can analyze the investment’s potential profitability with regards to their investment objectives. The investment’s intrinsic value is the amount investors would receive if they were to buy the enterprise at its current market price. A pro forma cap table also shows how an enterprise’s market price changed over time and how it compared to the peer group.
An pro forma cap table can be used to track the changes in proportions, percentages, and prices for certain characteristics of an enterprise. For example, it can calculate the rounding to the nearest whole number (the round to nearest whole number) for dividends as well as the effect of dividends on the organization’s net income. Investors can also analyze the effect of one type of investment – stocks – on another type of investment – bonds – using an excel spreadsheet called a bond analyzer. These types of analysis are possible because the values of the different investments can be rounded to the nearest whole number.
An investor may want to calculate the present value of an investment over time or calculate the impact of current prices on the enterprise. This could mean an analysis of what the value of an enterprise would be at various time intervals, perhaps annual revenues, six-month sales revenues, five-year sales revenues, or three-year sales revenues. Investors who do these kinds of calculations can get the present value of an investment by using the multiply and divide functions in their excel spreadsheets. The multiply and divide function can be used in an investor’s pro forma cap table. In the investor’s spreadsheet, he or she can enter the current value of the enterprise; the investment’s present value at any point in time up to the present day; or the effect of past dividends on the current value of the enterprise. Using the divide and multiply functions in the spreadsheet will result in a discounted value of the enterprise.
Many small businesses in today’s marketplace are early-stage, meaning they have not been trading on publicly traded exchanges for several years. Investors who deal with these types of startups can make money when the costs of buying shares in the startup fall after it goes public. This is called the pro forma cap table’s effect on liquidity. A small company that has not yet reached its public trading price may have much less liquid capital than the early-stage startups .
There are some situations where the costs of buying shares in a startup may be lower than the costs of selling the same shares after the startup becomes publicly traded. When this happens, an investor who buys early-stage startups should consider whether he or she wants to pay a premium for the difference between the expenses of capitalization for the startup and the expected return on the investors’ investment. If the anticipated return is not greater than the expenses for capitalization, then the investor should buy at the market price. This is the pro forma cap table’s impact on funding rounds.
An investor who decides not to use the spreadsheet method in his or her estimates should consider one of the following methods for estimation: use the portfolio construction technique in conjunction with the pro forma cap table, use multiple regression to estimate the ownership portion of individual securities, use the beta distribution to estimate the effect of liquidity, use a combination of the portfolio construction and beta distributions to estimate the ownership percentages for various classes of securities. The spreadsheet method is more time consuming and may require the assistance of a financial adviser. The beta distribution works by allowing a portfolio owner to set the rates at which returns are invested. These methods are more time consuming and should be used only when there is significant value in the returns to be gained.
A spreadsheet for a pro forma cap table has several limitations. First, because it is only a rough estimate, investors must rely on their own judgment as to the value of the startup. Second, because of the dependence on the estimate itself, it is difficult for the spreadsheet to incorporate the complete characteristics of the portfolio since all securities in the portfolio must be modeled and aggregated. Third, because of the reliance on the estimate and the potentially long term nature of the valuation of a startup, it is difficult for the spreadsheet to provide an accurate analysis of the portfolio since the timing required for different categories may not be the same as the timing required for other investments.
It is impossible to create a pro forma cap table that will work for all circumstances. However, with a little research and due diligence, an investor can come up with a working model that will allow an investor to conduct a proper valuations of all of the startup’s securities and then come up with a rough value of the overall worth of the portfolio. This will provide an investor with a way to create a pro forma cap table that is very useful when looking at valuations of startups.
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