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Cap table modeling is a very famous fashion design that has been used for more than half a century. The Co-founder of the Cape Cod fashion house Mr. Joseph Cornell has been credited as the one who first conceptualized the type of table used by many famous designers and top-class retailers worldwide. At the time of its conception, this particular type of table was very simple, with one arm having a single flat board attached to it. Later on, various modifications were made to the original type of table and it has now become a staple item in every designer’s work area. It was also later on recognized as one of the most efficient office furniture for most businessmen. Below are some important things you should know about how the cap table is made.
There are two important components of cap table modeling: the cap table itself and the template used for the same. The template can either be made manually using a pair of scissors or a piece of heavy cardstock paper, or it can be easily done by using a computer program. The cap table template has to be perfectly measured and then carefully cut according to the measurements given by the investors. After that, all that is left for the investors is to attach their own customized labels to the template to customize it.
In a nutshell, what a cap table modeling is about is a way of building a business relationship with a large number of investors without actually hiring them and making them a part of your business. Investors are usually paid an annual contract by the company they represent. The purpose of the yearly contract is to assure the investor that they will be compensated for any additional stakeholder in case their previous contract was not satisfied by the company. Most companies also have a cap table modeling wherein they give out a certain number of stock options to their valued clients which depends on the option market value at that time. The company then compensates the extra stakeholder through a monthly payment.
How does the cap table modeling works? Basically, startups starts like this: You contact two or more investors interested in buying some shares of your company’s stock and explain to them the benefits that they can get by purchasing those shares. You let them know about the company’s unique products and services so that they will be able to make a good decision on whether or not to invest. In this way, two to twelve investors will participate in the investment program. After a few rounds of introductions and negotiations, you will find yourself with eight or nine investors who invested into your program.
These investors will now form a voting pool. They will now vote on the proposals of the two entrepreneurs whom you were negotiating with and these will now become the new owners of your company. The original investors will receive a letter from the company founders informing them that they have been informed that one of their shareholders has purchased Convertible Debt Securities or CD’s with a cash amount of between ten thousand dollars and one million dollars. If the amount is between ten thousand and one million dollars, then the company founders will be required to pay these shareholders their original shares of stock for a period of time after which these stocks will revert to their original prices.
Essentially, startups modeling is done in order to provide additional stakeholder value by creating an additional opportunity for interested entrepreneurs to obtain cash flow while still retaining the ownership of the company they are running. These added incentives can come in the form of an annual contract, convertible debt or equity grants or discounted royalty payments. There are a number of ways by which these additional stakeholder benefits can be achieved including:
The cap table modeling process is also made possible through the use of a template. The cap table template is a set of standard contract forms which you can obtain online. Once you have obtained your own cap table template, you need to simply customize it to meet the specific needs of your particular business. This means that you can personalize the contractual language in order to make it as specific as possible to match the specific details of your business. All other things being equal, a standard cap table template should help you obtain a better number of investor interested in purchasing your shares.
Another way to create potential exit opportunities and obtain additional stakeholder benefits is to include a post-money valuation provision. A post-money valuation clause provides new shareholders with a specified amount of additional capital. Often times, the purpose of adding a post-money valuation provision is to provide additional funding sources which can be used to offset losses that the business experiences as it expands into new markets. In many cases, this will be a positive for both the company and new investors. Of course, you must always keep in mind that there are significant limitations on the inclusion of post-money valuation provisions into your standard contracts. Therefore, you should always work closely with your legal team in order to determine whether or not this type of provision would benefit your business and its potential exit from the business model.