Cap table modeling is increasingly becoming an important instrument for finance professionals to effectively utilize in their investment efforts. A cap table, simply put, is simply a financial tool which allows a company's CEO to "model" out a potential deal with a borrower. If the deal goes through, the CEO gets paid; if it doesn't, he or she still walks away with a share of the profits.

In order to model this out with ease, you must use cap table modeling at least a couple times per year. The first time you do it, keep in mind that the purpose is to see what the business cycles look like before committing to anything. If you want to make big money in your investing, you have to do it over again. However, with this template, you will model out how potential financing rounds would affect your cap table accordingly. There's a useful YouTube video below, where walk though all of the major components of the modeling template from beginning to end.

Essentially, cap table modeling is all about identifying and documenting potential "risks" to your business model before you make any moves. These risks are typically long term, either economic or organizational, and they can have a significant impact on your bottom line. For example, if the amount of capital you need to issue goes down, your additional stakeholder could go out of business. Or, if you're required to issue additional equity to raise capital, the new interest rate you're paying on your original loan could change significantly. It's important to identify these risks ahead of time, and then model how altering one variable can affect the other.

So now that we've defined the risks, let's talk about some potential solutions... How about an annual contract for a significant equity stake? Let's say, for example, that you need to raise money to buy shares in a small startup company. You've had your eye on it for a while, and believe there's a real opportunity to earn some money if you buy their shares in the company. How do you structure this? Your first option would be to offer a large initial lump sum, with a series of monthly payments tied to the company's equity, as a convertible preferred stock.

However, this seems a risky move for several reasons. First, many angel investors and venture capitalists won't want to invest their money in something like this. Second, the interest rates on convertible debt are high, making this a poor investment if you don't have enough capital to cover the conversion costs. And third, if you ever try to sell your convertible debt during a bull market, the price will probably be too high. This also doesn't apply to most traditional cap table modeling scenarios, but when you start focusing on how you structure your equity investments, you may see how important this is.

Instead of putting up shares in a startup that might go bankrupt, why not make a better decision, and put your money into a business where you could earn a good return on your investment, regardless of the health of the company? You can do this by creating a "handler" or "handler set". Here's how it works: instead of putting up one or a small number of shares for sale, you'll instead list an amount of money that you're willing to pay out to all shareholders, in the event that the business tanks and no buyers are found. So instead of looking at the value of a particular company and adding it to your cap table, if the business goes under, what you're really interested in is how much you would be entitled to if the business was a success. This way, you won't be putting out cash for the wrong share, and you'll also be avoiding the high fees that some shareholders are demanding.

You may think that listing the value of the shares in a startup is a strange thing to do, but that's because most new businesses don't have a well developed, well-researched exit plan or any method for receiving a fair price for their shares. With that said, if you're able to spot companies that are going to be successful, then you don't have to worry about their stock price after they go public. What you want to do is put your money into something that has a well developed exit strategy, as well as a well developed cap table. All of these things will lead you to making money, even in the worst years of a business' life. Once you've done this, it's much easier to keep putting your money into the business, because you'll know that it will be safe and you'll be able to count on an equity injection down the road.

If you're interested in learning more about how you can use pie charts and other financial tools to your advantage when it comes to valuing startups , then take a look at this cap table model template. This template was created by a well respected investor known for his "nose picking" ability. It takes the best attributes of traditional technical analysis and applies them to the world of small cap stocks. You'll find many other templates out there based on this one, but none will be as detailed as this one. Take the time to read it and consider using it as a template for valuing your own small cap stocks