Crabtree Lassen posted an update 4 months, 2 weeks ago
startup who start out their trading career usually ignore cap tables. They do not realize that the cap table is what determines the amount of profit you can make from your trading activities. If you were to lose all of your trading activity you would still be profitable as long as you had not lost all of your trading activity in the first place. What you are actually losing is your ability to determine if and when to get out of a trade.
You may think that the value of a share is based solely on whether or not an investor will buy it. That is why there are cap tables – so investors know how much they can lose. This is usually reflected in your cap tables by a separate tab in your spreadsheet which displays the asset total by shareholder and then any sort of useful interest calculation such as the reinvestment potential. Needless to say most investors naturally focus on this tab and this is usually where most successful traders begin negotiating when figuring out their entry and exit points for each trade. However there is more to this and you should be aware of how the spreadsheet works.
First, every cap table spreadsheet is created with a default setting of stocks with the highest EPS growth rate being used as the metrics for analyzing a particular index. The reason why is because this type of behavior is most likely to be found in real time and this behavior is difficult to simulate in software programs. Therefore the default settings are generally the optimum ones for most investors. After you select your cap table, you must then select the appropriate style of cell to use – standard, breakout, or pan chart. There are additional styles available, but the majority of traders tend to go with the standard and trading with the x-axis being Horizontal and the line being Vertical.
Now that you have your cap table, you are ready to actually analyze it. The next step is to create your own version of the pie chart that you saw earlier, but this time with dividends included as an EPS multiple times the current market price. This allows you to see at a glance which companies are paying the highest dividends per share as well as which ones have the best overall financial performance. The key thing to remember is that dividends ARE stocks’ only profit driver – they DO NOT produce income. Thus it is imperative to select companies with excellent balance sheets even if they are paying high dividends.
Of course we are focusing here on the Cap Table spreadsheet and not a fundamental analysis of a company’s financial statements. Here we are merely looking at how many shares of ownership each of the founders have in the company. Remember, the company founder is not only responsible for the company’s future success, but also for the interests of all the shareholders – even if they are owners themselves. Therefore it is necessary for the founder to know exactly how much ownership shares are owned by each person. A Cap Table can help you do this.
The third section of the Cap Table is usually called ‘other equity’. In most cases, this sub-set is used to provide additional information about the co-founders besides their current and agreed upon ownership of the company. For instance, a company may list its co-founders individually, or it may group all the equity of all the partners together under one major category such as the name of ‘Evan Investors’. Whatever the case, any Cap Tables spreadsheet should contain one or more of these sub-sets.
There is one important point to remember when using cap tables with your spreadsheet. Because you already know what the ownership percentages are for the individual members of the company, you now need to know the exact value of the ownership stake for the co-founders. To do this, you need to add the capital amounts to the Cap Table. However, you must also take into account the amount of cash invested by the founders in the company – it is impossible to determine this without having access to documentation covering the financial histories of the company.
Cap Tables are an extremely helpful tool to help you determine exit scenarios for the founding members of a company. If you know the value of the stake that each individual owner has, you can calculate the exact amount that they will earn in their exit. You can then calculate the amount that the investors will receive from their invested funds and compare that to the amount that you believe they will be able to earn in their selling of the business to all of their investors. Cap Tables are an essential part of any investor relations plan.