Posts Tagged: Capitalization Table

Good Dilution or Bad Dilution. Know When Greed is Good

In the 1987 film “Wall Street”, Michael Douglas in playing the lead role of Gordon Gekko proclaimed “Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures, the essence of the evolutionary spirit….”

Well what does greed have to do with share dilution and the entrepreneur?

Simply, in order to get capital an entrepreneur has to give up a portion of his or her company. Many entrepreneurs do not have deep pockets to delve into to feed their cash starved ventures – so they must ask investors for cash. For some entrepreneurs this becomes a tremendously agonizing and emotional decision since the thought of giving up a percentage of the company and thus potentially control of the company is untenable. The problem – the entrepreneur’s unbridled ego and an unabated view of fear and, yes, greed of giving up something of higher value than the utility that cash can bring. This can blur vision of getting the capital needed to get a company to the next stage of important development.

However, let’s take a step back. In the beginning a start-up company entrepreneur owns a 100% of the company. Sounds impressive, but a 100% of a high risk venture, with no revenues just expenses and a great deal of hope is really 100% of nothing. When cash is needed an entrepreneur has to raise money and it’s the issuance of shares that triggers ownership dilution. This is good dilution because when investors see value they expect a favorable return which means the company must have some accretive promised value.  So all things being equal, if an investor acquires 40% of the company for $500,000 and this $500,000 can create even more enterprise value, then the entrepreneurs 60% is worth more than the 100% initial ownership. Good dilution means a share unit has increased in price and when multiplied by the number of shares held by the entrepreneur it means an overall appreciated value of his holdings. Read more

Written by Lyn Blanchard, March 19th, 2012 | No Comments »

Filed under: Financial Forecasting, Financial Modeling Tips | Tags: , , , ,

The Arithmetic of Deal Structuring Using a Capitalization Table

The first step in structuring a deal is to determine how much capital your company needs to raise using a capitalization table. This calculation should be determined by your milestone plan translated into numbers within the financial model. You will be able to see how much is needed to get you through the next critical stages of your company’s growth and the cash flow needed to do so. Be realistic about two things. First what you plan for will likely take twice as long and will cost twice as much than you expected.

The second step is to determine the pre-money valuation. This is the tricky part because it’s a pricing decision that affects the share price you will be setting for the next round of financing.

As you determined in the prior round the milestones to get your company to the next level of development and you succeeded in accomplishing them then you have built enterprise value or the worth of your company. This means the value or price of shares in your company would have increased and from your perspective you can give investor a good argument why an increase in share price is warranted.

The other part of the equation is that the investor will have a say as well as to what they see as the pre-money valuation. The preceding is part of the negotiating process around valuation.

But keep in mind these principles when filling out your capitalization table: Read more

Written by Lyn Blanchard, February 20th, 2012 | No Comments »

Filed under: Entrepreneur tips, Financial Forecasting | Tags: , , , ,

Anatomy of a Capitalization Table

An important part of launching a company is deciding who owns what. When you have multiple owners or when giving out shares to employees, you need to know how the share structure of the company plays out each time you accept money from investors.

As I indicated in my previous blog on the importance of capitalization tables, they describe a company’s investment a story both past and future. For some entrepreneurs new to the process of raising capital a capitalization table can be a valuable tool in understanding the impact of an investment on such issues as ownership percentages, share valuation, dilution, and exit preferences. Learning how various deal making alternatives can result in varying outcomes will provide the entrepreneur with a better basis for negotiating with investors.

A useful cap table should allow for easy identification of each individual shareholder’s number of stock held at each step, their percentage owned at each step, the share price for each round, and the pre- and post-money valuations of each round.

Summary on the component parts of a capitalization table

Read more

Written by Lyn Blanchard, February 20th, 2012 | No Comments »

Filed under: Financial Modeling Tips | Tags: , , ,

eStore Checkout