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Cap table math is a big subject and deserves a lot of attention. But unfortunately, most people know very little about it. So before we start with the cap table guide, let me explain how cap table math works. The first thing you should note is that the less you care about a cap table, the greater the chaos (or “entropy”) creeps into your trading. The second law of thermodynamics states that the natural entropy of an isolated system will never increase.

However, when you are trading on shares, it’s quite impossible to “create” a chaos, as there is already too much randomness in the real markets. So the question then becomes, how do you get the optimal level of chaos for a given cap table? You use assets/liabilities. Here is how cap table math works.

First, there are some cap tables (not all, but a large majority) which use some sort of asset/liability structure to provide a level of protection to traders. This means traders can either use a diversified portfolio of stocks (all of which have low to negative probabilities of ending in a loss), or they can use a single stock or basket of stocks which is very correlated to other stocks in the portfolio (so if one stock loses value, all of the other stocks which make up the basket also lose value). Asset/liability structures such as these provide some sort of “protection” against losses, but they do not completely eliminate the random volatility of the market. This is why cap tables often include some discretion in their design.

Another type of cap table math is what I call the “ownership structure”. In startups , this means that instead of simply providing a buffer for the individual investor, this type of cap table actually gives importance to the ownership structure of the portfolio. When an investor has a significant portion of his portfolio in fixed assets (such as bonds), then he is more likely to enjoy a larger rate of return than if he had only a small percentage of his portfolio in equities (such as stocks). This is where most traders who are new to binary options trading have their problems.

Most newbie traders don’t realize that the biggest part of their trading capital is in equity, and that this is where they will see their returns. Unfortunately, most newbie traders also don’t know what their risk tolerance is, which means they often don’t set enough capital for their downside potential. If they do, they might be assuming that they will win every time, which is not realistic. Again, cap table math can help them better understand their tolerance for risk.

The other issue that many new Binary Options investors have is getting Investors’ consent to finance the business. The first time that I heard about cap table Math, it was from one of my new acquaintances who was going to fund the business. Unfortunately, he didn’t have the experience to know how to run the numbers, so he hired a consulting firm. From my point of view, this was a big mistake. Because the firm did not provide the necessary documentation, I was forced to pay the full price for the consulting services just because I didn’t know how to read the financial statements, which I wasn’t interested in doing.

What I’ve found over time, is that there is no substitute for experience. And while inexperience is fine, experienced traders and investors understand what is going on, and what to look for when considering funding sources. In addition, experienced traders typically already have their cap table math down and can use it to their advantage by understanding how convertible notes convert into cash, thereby reducing their risk. Lastly, experienced investors also understand that when funding a business, they don’t want to make the same mistakes as those who just funded their own company.

The bottom line is that if you really want to fund a business, make sure that you understand all of the risks and that you have the requisite experience. I’ve found that Cap Table Math can help traders and investors make better decisions and minimize their potential losses. If you’re just starting out, I recommend that you start out with a convertible note for your financing needs, especially if you know how to use the pricing mechanism, as well as the nuances of the pricing mechanism itself. Once you have the necessary experience and knowledge, then you can move on to funding more common types of business with more traditional means of financing, such as loans and merchant accounts. As always, make sure that you understand all of the risks that are involved in the capital markets before you put your money down. Otherwise, you may not have enough money to cover your losses…