GROUP 3 – 3BA-FM-2

Alcantara, Ma. Suzette B.

Manaloto, Alyssa Jane V.

Mercado, Karen R.

Rosales, Syrille Ann P.

2.2 VALUATION FINANCING AND CAPITALIZATION TABLES IN THE NEW

VENTURE

Financing

Financing is the process of providing funds for business activities, making purchases, or
investing. Financial institutions, such as banks, are in the business of providing capital to
businesses, consumers, and investors to help them achieve their goals. The use of financing is
vital in any economic system, as it allows companies to purchase products out of their immediate
reach.

Put differently, financing is a way to leverage the time value of money (TVM) to put
future expected money flows to use for projects started today. Financing also takes advantage of
the fact that some individuals in an economy will have a surplus of money that they wish to put
to work to generate returns, while others demand money to undertake investment (also with the
hope of generating returns), creating a money market.

Types of Financing

1. Equity Financing

"Equity" is another word for ownership in a company. For example, the owner of a
grocery store chain needs to grow operations. Instead of debt, the owner would like to sell a 10%
stake in the company for $100,000, valuing the firm at $1 million. Companies like to sell equity
because the investor bears all the risk; if the business fails, the investor gets nothing.
 At the same time, giving up equity is giving up some control. Equity investors want to
have a say in how the company is operated, especially in difficult times, and are often entitled to
votes based on the number of shares held. So, in exchange for ownership, an investor gives his
money to a company and receives some claim on future earnings.

Advantages

Funding your business through investors has several advantages, including the following:

 The biggest advantage is that you do not have to pay back the money. If your business
enters bankruptcy, your investor or investors are not creditors. They are part-owners in
your company, and because of that, their money is lost along with your company.
 You do not have to make monthly payments, so there is often more cash on hand for
operating expenses.
 Investors understand that it takes time to build a business. You will get the money you
need without the pressure of having to see your product or business thriving within a
short amount of time.

Disadvantages

Similarly, there are a number of disadvantages that come with equity financing, including the
following:

 How do you feel about having a new partner? When you raise equity financing, it
involves giving up ownership of a portion of your company. The riskier the investment,
the more of a stake the investor will want. You might have to give up 50% or more of
your company, and unless you later construct a deal to buy the investor's stake, that
partner will take 50% of your profits indefinitely.
 You will also have to consult with your investors before making decisions. Your
company is no longer solely yours, and if the investor has more than 50% of your
company, you have a boss to whom you have to answer.

2. Debt Financing
 Most people are familiar with debt as a form of financing because they have car loans or
mortgages. Debt is also a common form of financing for new businesses. Debt financing must be
repaid, and lenders want to be paid a rate of interest in exchange for the use of their money.

Some lenders require collateral. For example, assume the owner of the grocery store also decides
that they need a new truck and must take out a loan for $40,000. The truck can serve as collateral
against the loan, and the grocery store owner agrees to pay 8% interest to the lender until the
loan is paid off in five years.

Debt is easier to obtain for small amounts of cash needed for specific assets, especially if the
asset can be used as collateral. While debt must be paid back even in difficult times, the
company retains ownership and control over business operations.

Advantages

There are several advantages to financing your business through debt:

 The lending institution has no control over how you run your company, and it has no
ownership.
 Once you pay back the loan, your relationship with the lender ends. That is especially
important as your business becomes more valuable.
 The interest you pay on debt financing is tax deductible as a business expense.
 The monthly payment, as well as the breakdown of the payments, is a known expense
that can be accurately included in your forecasting models.

Disadvantages

Debt financing for your business does come with some downsides:

 Adding a debt payment to your monthly expenses assumes that you will always have the
capital inflow to meet all business expenses, including the debt payment. For small or
early-stage companies, that is often far from certain.
 Small business lending can be slowed substantially during recessions. In tougher times
for the economy, it's more difficult to receive debt financing unless you are
overwhelmingly qualified.
Valuation

Valuation is the analytical process of determining the current (or projected) worth of an
asset or a company. There are many techniques used for doing a valuation. An analyst placing a
value on a company looks at the business's management, the composition of its capital structure,
the prospect of future earnings, and the market value of its assets, among other metrics.

A valuation can be useful when trying to determine the fair value of a security, which is
determined by what a buyer is willing to pay a seller, assuming both parties enter the transaction
willingly. When a security trades on an exchange, buyers and sellers determine the market value
of a stock or bond.

Venture Capital Method (VCM)

This is a valuation method mostly used by startup investor to value pre-revenue companies.

VCM Term

 Pre-Money Valuation: The value of the venture before investors comes in with their
money
 Post-Money Valuation: The value of the venture after investors have added their money

Post-Money Valuation = Pre-Money Valuation + Investment Amount

Capitalization Table

A capitalization table, also known as a cap table, is a spreadsheet or table that shows the
equity capitalization for a company. A capitalization table is most commonly utilized for startups
and early-stage businesses but all types of companies may use it as well. In general, the
capitalization table is an intricate breakdown of a company’s shareholders’ equity.

Cap tables often include all of a company’s equity ownership capital, such as common equity
shares, preferred equity shares, warrants, and convertible equity.

Understanding a Capitalization Table

 A basic capitalization table lists out each type of equity ownership capital, the individual
investors, and the share prices. A more complex table may also include details on potential new
funding sources, mergers and acquisitions, public offerings, or other hypothetical transactions.

Capitalization tables are typically used privately by private companies to provide information on
a company’s investors and market value. Below is one example of a capitalization table.

Company Valuation

Total Value Per Share # of Share % of Total

Series A

Pre-money Valuation P 1,000,000 P5 200,000 22.2 %

New Investment 3,5000,000 5 700,000 77.8%

Post-money Valuation P 4,500,000 P5 900,000 100.0%

 Company Ownership Capitalization Table
( Cap Table)
Capital Common Preferred Total Shares %
Share Shares Ownership

Shareholders

Founders P 1,000,000 200,000 200,000 22.2%

Investor 1 100,000 20,000 20,000 2.2%

Investor 2 250,000 50,000 50,000 5.6%

Investor 3 100,000 20,000 20,000 2.2%

Investor 4 1,200,000 240,000 240,000 26.7%

Investor 5 250,000 50,000 50,000 5.6%

Investor 6 100,000 20,000 20,000 2.2%

Investor 7 500,000 100,000 100,000 11.1%

Investor 8 400,000 80,000 80,000 8.9%

Investor 9 250,000 50,000 50,000 5.6%

Investor 10 350,000 70,000 70,000 7.8%

TOTAL P 4,5000,000 200,000 700,000 900,000 100.0%

Overall, a capitalization table shows the total market value of a company and its
components. As a key point of reference for business managers, the capitalization table is
considered in every financial decision that has an impact on market capitalization and the
company’s market value. As such, it is important for the capitalization table to be accurate,
customized to the business needs, and regularly maintained for decision making based on the
most current information.
 References:

Hayes, A. (2022, March 31). Financing: What it means and why it matters. Investopedia.
Retrieved April 11, 2022, from
https://www.investopedia.com/terms/f/financing.asp#:~:text=What%20Is%20Financing
%3F,help%20them%20achieve%20their%20goals.

Chen, J. (2021, December 7). How the valuation process works. Investopedia. Retrieved April
11, 2022, from https://www.investopedia.com/terms/v/valuation.asp

Young, J. (2022, February 8). Capitalization table is a familiar document in the startup world.
Investopedia. Retrieved April 11, 2022, from
https://www.investopedia.com/terms/c/capitalization-table.asp