What is the Capital Table?
The purpose of a Capital Table is to provide companies with an accurate comparison of expected business results between initial investment and subsequent years of operation. A Capital Table provides an economic view of the company based on specific financial measures such as average dollar earnings per share (EPS) over the last five years, price per share (PPS) to buyers, and market capitalization. It is important for potential investors to understand the relationship between these numbers and realistic expectations of future profitability. While a Capital Table is not required when applying for startup funding, it can significantly improve the process by which entrepreneurs choose financing opportunities.
A Capital Spread Bet offers two different alternatives to companies looking to raise funds. The first type of Capital Spread Bet allows an investor to select multiple stocks with the same starting capital. An investor will pay for each share of stock that he or she ends up buying at a discount, or a premium. This premium is not tax deductible, but if the company makes no profit in the year the investment is made, then the investor will not be charged tax on his or her initial share holdings. If the company makes profit, the shareholder will receive a profit from his or her premium.
The second type of Capital Spread Bet offers two advantages to startup entrepreneurs. First, because the discount or premium is paid upfront, there are no costs associated with this type of bet. Second, if the company makes profit during the year the bet is made, the proceeds will be tax-free. However, this advantage does not apply if the company makes profit during the year the option is not exercised. In that case, the startup founder will have to pay taxes on the income he or she receives from exercising the option.
One of the most common objections to venture capital funds and angel investors is that they are inherently risky due to the extreme concentrations of wealth between potential partners. Specifically, this occurs because startups typically do not have the deep pockets of established businesses that can provide equity as well as preferred stock. For these companies, it is not possible to raise substantial amounts of venture capital on their own. Consequently, startups must rely upon outside financing sources to satisfy their financing needs.
Unfortunately, cap tables can make it really confusing for startups to obtain capital from third parties. When a venture capital funding company pools resources with other businesses, the companies share in the equity risk of those projects. Consequently, it is difficult for a startup to determine whether its anticipated return on equity will be greater than the cost of capital that it would incur if it sold equity alone.
Moreover, many startups fail to realize the full benefits of capital appreciation. Due to the extreme concentration of ownership concentration in these early stages of operations, it is often difficult for startups to accurately forecast the amount of money they will eventually realize through dividends and capital appreciation. Nevertheless, most venture capitalists believe that it is relatively rare for startups to experience returns from capital appreciation during their initial operations. Consequently, this "risk" can be greatly underestimated by startups. In some cases, companies may use the cap table in order to inflate their reported EBIT, assuming that they will realize significant profits in their first two years of operation.
The primary purpose of the cap table is to provide equity participants with an accurate projection of capital appreciation. However, this calculation can also cause overly optimistic founders to view their ownership interest as a "lock" to performance-based stock options. This can lead startups to take larger dividends or "bulk up" their shares without realizing the true implications of capital appreciation. Many new entrepreneurs become confused when this happens, as they believe that they are receiving the full benefits of their investment.
Because the valuation of a startup's ownership interest changes depending upon the performance of the business, cap tables must be strictly maintained. The value of the dividend and capital appreciation should not be based on the value of the ownership interest. In order to calculate the value of the enterprise cap, an owner should first provide the Bureau with all of the relevant information that it requires. The Bureau then determines the fair market value of the ownership interest.