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A pro forma cap table, also called invoice form, is a sheet that presents the financial information of an organization, including its current assets and liabilities. The sheet combines financial data from different documents to provide the key metrics used in the analysis of a company’s balance sheet. It compares the value of the organization’s assets to its liabilities. By comparing the two, the manager can determine if the income or assets of the organization are increasing or decreasing. The manager can also calculate the potential gain or loss from a certain strategic transaction.

Pro forma cap tables provide the basis for valuation of preferred stock, preferred stocks, warrant equity, option or warrant equity, retained earnings, short term debt, and equity derivatives. This provides the necessary information for investors to assess the financial strength of a company. A pro forma cap table must be prepared before an initial public offering is made and must be updated as the business’s balance sheet and information from internal management reports are presented to the shareholder. Investors need to know if the business has made any acquisition transactions and also need to know if the valuation of its common stock is higher or lower than its bonded issue and preferred stock.

One of the primary uses of the pro forma cap table provided by internal management reports is to determine if an acquisition would be financially beneficial to the organization. Investors need to investigate how much of the purchase price would be used for working capital, inventory, and working capital requirements. This would help investors determine the amount of funding required to make an acquisition. An acquisition would have a higher attractiveness to investors if there is good cash flow coming from the stock options and if the business has room to raise more capital. Additionally, if the valuation of its common stock is significantly higher than the bonded issues and preferred stocks, an acquisition may not be as desirable to the new owners.

Another use of this valuation model is when an investor is determining if he can purchase additional common stock from the company for immediate cash. If the valuation determines that the company is experiencing great distress and the sale of existing shares will not be able to raise the additional funds needed, an investor will want to avoid buying up shares of its common stock until things improve. For this reason, the valuation of the pro forma cap table will include a letter grade reflecting the financial health rating of the business as well as the liquidity of the shares of stock.

Determining the intrinsic value of shares of stock is another important factor to consider when using the pro forma cap table. Dividends received by shareholders are included in this number. The dividend yield to equity is calculated by dividing the current market price per share by the dividend per share. If the dividend per share is higher than the market price per share, it is an attractive investment for the investor. Likewise, if the dividend per share is lower than the market price per share, it may be a bad idea for the investor to purchase shares of stock in the organization.

The valuation of the pro forma cap table also takes into account the effect of adjustments to the round number of stock options and warrants issued during the course of the year. These adjustments are designated as round number ones, and they have a significant impact on the valuation of the shares. For example, if the corporation issues one or more capital stock options during the year, and these options are designated as six-year options, the subsequent per-share earnings of these securities will be less than the earnings per share of the six-year options at the end of each round. Because the underlying shares may drop in value due to the effect of these options, an investor will need to offset this additional expense against the additional income from the capital stock options during the subsequent rounds of valuation.

An alternative to computing the fair value of the underlying shares using the pro forma cap table incorporates the use of the expiration date as a basis for determining the price per share by assuming that the shares will finish their maturity before the expiration date. This option is only available to an investor that purchases a minimum of 100 shares. In this manner, the investor would sell the additional shares after the maturity date and receive a profit when the stocks finish lower than the option price per share. This method of valuing the stock is most effective if the investor does not plan to exercise the option.

Other factors such as startup companies are not evaluated by the pro forma cap table. A startup company is an unknown to the majority of investors and tends to stay out of sight until a large number of investors acquire shares of a startup. Consequently, these startups are not typically priced on the same basis as more established companies. However, this does not mean that a startup should be left off the valuation table entirely; depending upon the overall performance of the market and the performance of individual startups, investors may decide to purchase shares of these companies at a later date if they post sufficient profits for the valuation to be an accurate measure of their value.