What Is a Pro Forma Cap Table and How Is It Used?

A capitalization table details equity ownership. A “pro forma” capitalization table projects future ownership scenarios, anticipating changes to the company’s ownership structure before they occur.

Understanding a Capitalization Table

A capitalization table, often called a cap table, presents a snapshot of a company’s ownership structure at a given point in time. It lists all securities issued by a company, such as common shares, preferred shares, options, and warrants. The purpose of this document is to track who owns equity, the specific types of shares they hold, and their respective ownership percentages. It provides a transparent view of the distribution of equity among founders, employees, and investors.

Basic elements found in a standard cap table include shareholder names, the number of shares each shareholder owns, and the class of shares (e.g., common or preferred). It also details the percentage of ownership each stakeholder possesses and any special rights associated with those shares. This document serves as a historical record of all ownership changes from the company’s inception.

Defining a Pro Forma Capitalization Table

The term “pro forma” originates from Latin, meaning “for the sake of form” or “as a matter of form,” indicating a hypothetical or projected scenario. A pro forma capitalization table is a forward-looking projection that models a company’s ownership structure after a specific event or transaction. This could include a new funding round, the issuance of new equity, or the conversion of convertible debt or Simple Agreements for Future Equity (SAFEs).

The distinction between a standard cap table and a pro forma version lies in their temporal focus. A standard cap table illustrates current ownership, while a pro forma cap table forecasts the future, hypothetical ownership structure. Its main purpose is to visualize the potential impact of future transactions on ownership percentages and to anticipate the effects of dilution on existing shareholders.

Information Needed for a Pro Forma Cap Table

Constructing an accurate pro forma cap table requires gathering specific data. The foundation begins with the company’s current capitalization table data. This includes a comprehensive list of all existing shareholders, the types of securities they hold (such as common stock, preferred stock, warrants, or options), and the total number of outstanding shares across all classes. This initial data establishes the baseline ownership percentages before any proposed changes.

Information about the proposed transaction is also necessary. For a new investment round, this includes the amount of money to be raised, the pre-money valuation of the company, and the anticipated price per share for the new equity. If an option pool for employees or advisors is being created or expanded, its size must be determined. The terms of any convertible notes or SAFEs that are expected to convert into equity are also important inputs.

Convertible notes and SAFEs often include specific conversion terms, such as valuation caps or discount rates, which directly influence the number of shares issued upon conversion. For example, a convertible note might convert at a discount to the next equity round’s price or at a price determined by a valuation cap. Any other potential changes to the equity structure, like new employee stock grants or the exercise of existing warrants, must also be factored in. Each of these data points is integrated into the projection to model the post-transaction ownership.

Calculating Pro Forma Ownership

Once all the necessary information is compiled, calculating pro forma ownership involves several steps to determine the new equity distribution. The starting point is the existing fully diluted share count, which includes all outstanding shares and any exercisable options, warrants, or convertible instruments. This figure represents the total shares recognized as part of the company’s equity.

New shares issued for a fresh investment round are calculated based on the agreed-upon pre-money valuation and the investment amount. For instance, if a company raises $2 million with a $10 million pre-money valuation, the new investment represents a portion of the post-money valuation. The number of new shares is then determined by dividing the investment amount by the new share price. Shares reserved for new or expanded employee stock option pools are added to the total share count, as these shares will dilute existing ownership.

Accounting for the conversion of convertible debt or SAFEs into equity is a significant aspect. These instruments convert during a qualified financing round, with their conversion price often influenced by a discount rate or a valuation cap. The investor receives shares based on the lower of the price per share determined by the discount or the price per share implied by the valuation cap. The principal amount of the convertible note is divided by this conversion price to determine the number of shares issued to the noteholder. After all new shares are added, a new total fully diluted share count is established, and each stakeholder’s new ownership percentage is calculated.

Practical Applications of Pro Forma Cap Tables

Pro forma cap tables are used in various real-world scenarios to help companies and investors make informed decisions about equity. They are utilized during fundraising rounds, allowing companies to illustrate the impact of new investments on existing shareholders’ ownership percentages and to define the ownership stake for new investors. This transparency helps in negotiations by providing a clear picture of the equity distribution post-financing.

Companies also employ pro forma cap tables for scenario planning, modeling different investment amounts, valuations, or equity structures. This enables them to assess the potential outcomes of various strategic choices before committing to a specific path. In situations involving mergers and acquisitions, these tables help project the combined ownership structure of the entities post-transaction. They are also used for employee equity planning, assisting companies in evaluating the dilutive effect of new option grants or stock awards.