A pro forma cap table, also known as a non-qualified option exercise cost model, is a spreadsheet which depicts the capital structure of an organization in relation to a potential deal. The spreadsheet simultaneously combines information of the entire organization to highlight the current value of its holdings, the amount of dilution potential, and the probable return on an acquisition. It provides investors with a comprehensive picture of company performance. This product was created by Christopher Freville and John C. White, two investment executives. The work was presented at the American Society of Business Editors annual meeting in February, 2021.

Investors interested in purchasing stock based on the prospect of substantial dividends will find the information in a pro forma cap table extremely helpful. It gives the average price per share for each year since inception of the company, current diluted earnings per share, price/book ratio (PS/L), and EPS revisions, as well as other financial metrics. Dividends are only shown if the option was exercised. The shareholder can then see what percentage of ownership is attributable to him or her, how much he or she stands to gain by selling, and what kind of tangible rewards he or she stands to gain from such a transaction.

Many investors are leery of buyout transactions and what they mean to the value of the corporation. The use of a pro forma cap table helps them see the whole picture. It gives the investors an idea of what they stand to gain by selling their ownership interests, and how much they stand to lose if they do not exercise their options. This simplified approach makes it easier for new and experienced investors to understand their own and other investors’ financial results.

When an investor receives cash in the amount of his shares of stock, he or she owns those shares and becomes a shareholder. To determine the value of shares, there are several measurements that must be made. One of those measurements is the net worth of the entire company. All current and past shareholders receive a share of the company’s profits, minus any initial capital, as compensation for their services.

If that compensation is less than the price per share paid to each shareholder, the income to each shareholder is less than the total profit of the business. Any equity added to the balance will also decrease the net worth of the business. A pro forma cap table helps the investor see at a glance if the total income of the business is more than the net worth.

Some companies have cap tables for common shares and another type of pro forma cap table for preferred shares. Common shares are pieces of stock that are listed on the New York Stock Exchange and traded like stocks. Preferred shares are shares that are issued by a corporation to holders, who pay a fee for a specified period of time in return for receiving certain dividends. These dividends are only paid when the company makes money or sells its stock.

An alternative type of pro forma cap table provides a method of calculating the cost of trading. When a company sells its shares, it must pay the purchaser a specific amount per share. The price per share reflects the amount of money necessary to buy the minimum number of shares needed for one individual share. The cost of trading is determined by assuming all shares were bought at the same price and then multiplied by each share’s selling price to come up with one final price per share. All investors are typically instructed to add their personal investment, if any, to the funds used to cover the costs of trading.

In general, an investors’ equity will increase over time as the company increases its earnings. startups will be much greater if the company earns more money than it pays out in dividends. To create a pro forma cap table, you would need to take into account the amount of investment capital each investor contributes. The number of shares each investor owns will also have an effect on the final price per share. In general, equity investors who own more shares will pay more for their stock. You can calculate your capital and dividend payouts by using an EQVista package.