When a business uses preferred stock equity to fund its operations the cost of preferred stock forms a part of the weighted average cost of capital of a business.
When a business outgrows the funding provided by angel investors it might seek more substantial investment from a Series A funding round. The Series A round is often a trigger for the conversion of convertible loan notes and an increase in the stock options pool. The Series A capitalization table is used to show the effect on the percentage ownership of a business following these changes.
When a business has outgrown funding from family and friends it might seek more substantial investment from business angels to fund for example product development, prototype production and market research. The angel investors cap table is used to show how the current shareholders, including the founders, are diluted by the introduction of this seed investment.
When a business is in its early stages and has perhaps developed an idea but does not yet have a working prototype of its product or traction and revenue, it often needs to be funded by outside investment capital from family and friends or other pre-seed investors. The pre-seed investors cap table can be used to demonstrate how the founders are diluted by the introduction of this outside investment.
A stock options pool is created by a startup business in order to set aside sufficient shares to enable it to build up, incentivize and retain a team of key personnel. The effect of the stock options pool is to dilute the existing shareholders.
The startup cap table is a record of who owns what percentage of the equity of a startup business. Prior to any investment it simply represents the ownership of the founders and any equity awarded to the team including employees, consultants, and advisers.
Angel funding is used to provide a startup business with equity investment to fund growth. The angel investor is seeking higher returns for the risks involved and tries to limit the initial valuation placed on the business in order to maximize their equity percentage.
The availability of finance for a startup business determines its ability to expand and grow. By using bootstrap finance the growth will be slower but the value of the business needed to meet the personal financial goal of the entrepreneur will be smaller.
A business needs to finance its working capital requirements using a combination of short term and long term funding sources. Permanent working capital is best financed with long term funding such a equity or long term loans, whereas temporary seasonal working capital is best funded by short term loans or overdraft facilities.
The capital structure of a business is the mixture of equity and debt it uses to finance its operations. The optimum capital structure is one which minimizes the weighted average cost of capital and thereby maximizes the valuation of the business.