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A pro forma cap table, sometimes called a pro forma balance sheet, is a spreadsheet which displays the financial information of an organization in relation to its cap and dividend payments. Investors use the pro forma cap table to compare the income and balance of an organizations as compared to its purchase price. It is basically a summary of the organization’s capital structure. The spreadsheet models the relationship between the equity holders and the cap based on net income from equity and dividend payment per share.

Investors are typically familiar with the valuation of mutual funds. For example, mutual funds are purchased by institutional investors either through a stock exchange or directly. When an investor purchases shares of stock from the fund, there is an obligation for the investor to buy a specific number of shares at a specific price. In order to determine the cost of the fund, investors must add the total number of shares outstanding plus the net worth of the fund as a whole. Investors can then calculate the net value of the fund using the pro forma cap table.

An investor uses the pro forma cap table in order to determine the price per share of an issuing share. For example, if a particular share has one hundred thousand shares, the price per share can be estimated as two hundred thousand shares times the total number of shares times the net current value of the share as a whole. This is an estimate, and investors must make certain that the actual price per share is less than the estimate. Investors should keep track of the actual prices as they fluctuate and adjust accordingly.

Investors use the pro forma cap table in conjunction with other tools such as financial statements and other valuation inputs in order to determine the value of a venture. It is important to have accurate valuation information if investors are going to successfully fund a venture capital or other financing solution. The valuation is used to determine the amount of equity capital required to finance a business startup as well as determining the amount of debt which will be required to finance the business. Valuations will also include the effect of any expected or estimated dividends from the venture capital and the effect of borrowing from private investors. A successful venture capital investor will be able to determine if the venture will require significant outside financing and will be able to determine if the valuation of the organization will provide adequate funding for the venture.

One of the main reasons why investors use the pro forma cap table to determine the valuation of their organization is due to the effect of dilution. D dilution is the process by which stockholders voluntarily sell their shares of ownership in a company. This decreases the amount of shares available to each shareholder. If the amount of diluted shares is significant it can cause a significant decrease in the price per share of the organization’s common stock.

An investor who uses the pro forma cap table to determine their capitalization is also able to determine the value of the enterprise. Investors who participate in a financing round will receive priority notice as to the issuance of additional shares by the corporation and will be able to purchase these shares at a discounted rate from the issuing entity. If the investor purchased all of the additional shares before the financing round and resells them to a third party at an inflated price, they may have obtained a substantial under valued asset. By using the pro forma cap table, an investor can reduce their risk by receiving priority notice and a reduced price per share. However, an investor who purchases shares based on an incorrect float can lose all of their investment, including their investment in the corporation.

Capitalizing on the pro forma cap table enables an investor to determine the amount of equity dilution which is required for them to satisfy their existing debt obligations. In many circumstances, when companies issue equity to existing shareholders or issue second mortgages to them, they do not comply with the letter of the law which requires them to give full and current dividend payments. An investor who purchases these shares in a capital raising transaction may experience problems if the corporation fails to pay this dividend in a timely manner. Investors need to be sure that the dividend payment they receive is a fair and sufficient rate of return. In order to provide this service, many investors utilize the services of an option strategy which requires them to purchase shares at a discount while waiting for an acceptable rate of return to occur.

Using the pro forma cap table and option capitalization strategies is only one part of the overall puzzle which must be used to make an accurate analysis of an offering’s financial health and viability. Investors need to ensure that they are acting within the law and using strategies which are consistent with their long term investment goals and objectives. By following good investment advice and developing an accurate and complete capitalization structure for any business, an investor can achieve their financial goals and reduce their risk level and their own personal losses. This can only be achieved if investors know what they are looking for and have chosen the correct entity for their own investment strategy. They must use all of the tools available such as the option capitalization table, the option valuation formula, the pro forma cap table, and the offsetting index option in order to choose the right entity for their own personal investments.