Options Trading and Capital Table
If you have worked at venture capital firms, or as an investor in small businesses, then you may have heard of the capital table. This is a document that lists the different types of shares that can be owned by employees or venture-rounds equity holders. The purpose of this document is to ensure that only those companies which will benefit from the investment are listed. In other words, it is a way to prevent one kind of stakeholder from controlling a large portion of a company's shares.
A capital table is created on the basis of two factors: whether the shares being listed are in a hands-off arrangement, or if they are being listed in a public registry. If the shares listed in a public registry are not being owned directly by employees or the owners themselves, then the capital table is not relevant. It does not matter how many employees or who the employees are as long as there is direct ownership of the shares. However, when the shares are owned indirectly through the employment of the owners, then a capital table is relevant. It lists all of the companies that indirectly own the shares listed in the public registry. In other words, if an investor owns 100 shares indirectly through his employees, then he has 100 shares indirectly owned by the company.
The table shows all companies that are members of either the Pink Sheet or the Over the Counter Equity Market Leaders' List. These companies are also in the hands-off arrangement. Only those companies that are registered with the SEC are deemed relevant for listing on the capital markets. Because they are not actively traded on the equity exchanges, this does not necessarily mean that they are inexpensive or even risk free. There is still a degree of risk involved.
When companies in the Pink Sheet listing are willing to trade their shares without going through the customary proceedings of a public market, this creates a unique opportunity for investors. For instance, there are companies like Underwriters, who are not required to exercise their buy/sell option with respect to their shares until the market leader executes a transaction in the open market. At that point, the Underwriter becomes a direct seller of the equity (the Underwriter). This is referred to as an underwriter's margin. The proceeds from the sale of the Underwriter's margined position are applied to the outstanding capital account.
While the capitalization table and the cap tables are very confusing, they are also really confusing because the meaning of each word can be confusing in its own right. The meaning of the word equity varies from document to document and company to company. So, how do you know which capital structure would be best for you?
The cap table provides information about the ownership percentages for employees. However, the way the numbers are presented can be very misleading, especially when it is presented on the principal amount alone without reference to the other costs associated with ownership. The actual cost to the investor could be significantly more than the reported figure. And, while startups will incur expenses, not all share holders will have the same expenses.
The cap table, which is calculated by the underlying asset valuation methodology, is calculated without taking into account the effect of dilution. Dilution can reduce the value of the shares and should be taken into consideration. However, there are many ways that dilution can affect the value of your stock and the overall value of your company. An option pool represents a series of securities that would be owned in the event that the Company encountered an event that prevented the Market Manager from selling all of the common stock and paid the shares instead as an option pool. While this method of pooling represents a low risk option for investors, the downside to this method is that the Owner now owns a portion of the Company, rather than all of the Company's common stock.
Options trading and capital financing are tricky areas. They are relatively new and often change rapidly. If you are a novice, it is best to stick with the tried and true methods that are not dependent on one's personal knowledge of the business world. It can be helpful to seek the advice of seasoned professionals who are willing to offer their experience and knowledge about what has worked and what has not. These professionals know the ins and outs of the stock market and how to analyze market trends and options.