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How to Read a Small-Cap Company’s Share Structure
A great project can sit inside a terrible share structure.
I’ve seen versions of that problem enough times that I now look at structure very early when I’m evaluating a small public company.
The story tells me what the company hopes to become. The cap table tells me what I actually own if I participate.
Start with the shares
I want the basic shares outstanding and then the fully diluted number. The basic count tells me how many common shares exist today. Fully diluted gives me the broader view by including securities that may become shares, such as options and warrants.
If a company has 50 million shares outstanding but another 30 million warrants and options sitting behind them, I don’t want to evaluate the economics as if those additional securities don’t exist.
Then I look at the prices
Not all shares were created at the same price. Who bought at five cents? Who bought at twenty? Where are the warrants priced? When do they expire?
This gives me clues about where potential selling or financing pressure may appear. If a large block of cheap paper becomes free trading into a strong move, some holders may reasonably take profits. That doesn’t make the company bad. It means I should understand the supply that may come into the market.
Warrants and debt cut both ways
In-the-money warrants can represent future dilution. They can also bring cash into the treasury when exercised. I want to know both sides.
I also want debt, convertibles, royalties and other obligations. A clean-looking share count can hide a complicated economic structure. If the company succeeds, who gets paid first? What can convert into equity? Are there secured claims against the key asset?
Structure changes the upside
This is why I don’t get hypnotized by a ten-cent stock. I want the value of the whole company and the claims against that value.
Structure is not the sexiest part of the story. It is one of the parts that most often tells me whether the story can translate into a good shareholder outcome.
For the complete framework, see How I Evaluate a Small-Cap Public Company and How Small-Cap Public Companies Raise Capital.
Explore the Capital Markets hub for the complete collection of frameworks and articles.
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This article is part of my Public Venture Capital authority series. Continue with What Is Public Venture Capital? A Guide to Early-Stage Public Companies, Investor Relations, Promotion and the Difference Between Attention and Value, How Reverse Takeovers Work in Public Venture Capital and Liquidity in Small-Cap Stocks: Why Being Right About the Company Is Not Enough.
This article is educational only and not investment, accounting, legal or securities advice.
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