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.
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.
New equity capital is included in the cash flow statement of the projection as a positive figure as it represents cash flowing into the business from investors. For example, if in year two the plan inject new capital of 5,000 to finance the purchase of new machinery, the figure of 5,000 should be included in the cash flow statement on the proceeds from the issue of new share capital line.
The opening day capital balance forms part of the opening balance sheet of the business. Capital represents cash and cash equivalents introduced by the owners of the business.
The capital opening balance is recorded in the balance sheet of a business under its own heading of capital and together with retained earnings, forms part of the owners equity in the business.
Having estimated the startup costs of the business for the financial projection, it is now necessary to consider how these costs are going to be funded. Funding can be provided either by way of capital or debt.
Startup capital is the amount of cash injected into the business by the founders and the investors to help fund the start up costs. Any startup costs not funded by capital investment will need to be funded by debt and borrowings.
In return for injecting the startup capital, the owners and investors receive a percentage of the equity of the business, and make a return on their investment either by way of capital appreciation when the business is sold, or by way of dividends paid out by the business.