Pro Forma Capitalization and Valuation of Offering Circulars
A pro forma cap table is simply a spreadsheet which represents the capitalization structure of an organization today and immediately after a potential new investment (i.e., on a pro forma capital basis). It depicts the percentage ownership of total investors, fully diluted, immediately after a financing round and differentiates common and preferred shareholders, amongst many other things. Capital structure diagrams can be used by individual investors or by business plan professionals to create a pro forma cap table. For any business that is planning to raise money under the Series 7 option, it is important to have the correct capital structure information for investors during the underwriting process.
startups must use a pro forma cap table in determining the value of the shares of stock they are considering to purchase for a client. This information is used in order to provide the underwriter with the current value of the company's stock using an exercise price per share model. The use of this pricing model allows the underwriter to provide a range of maximum price per share based on the current market price of the stock. Investors need to understand that the exercise price per share will only be accurate for the current round of trading. Therefore, a stock that was priced at a certain price per share in a previous round may not necessarily be priced at the same price per share in the future.
Most commonly, the valuation is performed using a multiple-period approach. There are several reasons why this may be the case, including the fact that small cap companies typically do not have enough experience to qualify for venture capital. If funding is obtained from a venture capital firm, the valuation will be based upon the expected proceeds from the sale of the shares. However, if financing is obtained through a private investor, the valuation will be performed using the date of the last investment to the investor as the basis for computing the valuation. In either case, the valuation is done using the last price paid for the shares by the purchaser or investors. In some cases, the valuation will also include an adjustment for the amount of time it takes to recoup the cost of the investment, referred to as the implied valuation of the company.
Investors interested in obtaining the valuation conducted by a professional institution should first gather information on how the valuation is performed. This includes gathering information on the company, the underwriters, and the Excel spreadsheet provided by the brokerage that conducts the valuation. The spreadsheet can be Excel or CSV depending on the particular situation. The purpose of the valuation is to provide information to the investors on the overall performance of the company and an expectation of ownership in the future. The data can also be used in the process of evaluating potential venture capital funding.
An investor interested in obtaining information on the valuation of their shares should note that the valuation only considers the current value of the shares, not the future potential value of the shares. It does not take into account the effect of dividends or other returns on the equity. The investors should also note that the valuation does not consider if the shares are delisted from the stock market index. Delisted shares will not be reflected in the valuation and will not be taxable to the shareholder.
The Excel spreadsheet provided by the brokerage will provide the investors with the rounding to be used in their calculations. Most of the time, the Excel spreadsheet will also be a part of the quote that the brokerage provides to the investors. The Excel rounding used by the brokerage should be consistent with the rounding used by the underwriter when providing the quote.
The value of the total stockholders' equity and the cap table provided by the brokerage should be used to calculate the value of the outstanding shares of stock. Most of the time, this is the first part of the pro forma cap table that investors are provided with. This is the maximum potential return on the outstanding shares that can be realized by the shareholders through dividends. The spreadsheet provided for the purposes of calculating the pro forma capitalization tables should be one that is easy to read and understand.
In most cases, the valuation will also include information on the earliest date that a payment is due by the venture capitalists. The date should be specified in the contract or in the Excel spreadsheet provided by the venture capital firm. This date is an assumption made by the venture capitalists as to the future performance of the business. It is based on the past performance of the business and its past and future potential for profit and dividend payments. The valuation should include the balance sheet from the last three years and the income statement that breaks down the income of the venture capital firm and its individual members.