Scenario modelling: Explore the possibilities for your organisation’s equity

Scenario modelling offers many benefits for businesses, most notably its ability to predict multiple outcomes based on variables or assumptions. This prepares your organisation for various potential futures and helps you make practical decisions or considerations based on these predictions – in areas such as equity management and planning.

Scenario modelling also uncovers new growth opportunities, enhances employee satisfaction and ensures your business is well-positioned to adapt to changing conditions.

In this article, we’ll explore the essentials of financial scenario modelling for equity management, including the key benefits for stakeholders. We'll also provide an example to illustrate how tools like Ledgy can streamline your scenario modelling efforts.

What is scenario modelling?

Scenario modelling is the practice of analysing a range of possible future occurrences by examining different variables, allowing businesses to explore a range of potential outcomes. This is useful for short, medium and long-term predictions.

According to Tim Vipond of the Corporate Finance Institute, “Most business managers use scenario analysis during their decision-making process to find out the best-case scenario, as well as worst-case scenario while anticipating profits or potential losses.”

Brooke Ballenger from the Association for Financial Professionals goes further, explaining that a finance department’s response to unpredictability is to be “prepared for everything by holding multiple points of view simultaneously”. This, essentially, is the purpose of scenario modelling.

Unlike conventional forecasting, which typically focuses on the single, most likely outcome, scenario modelling takes various inputs to predict various potential futures. This approach is most useful when comparing different possible outcomes to a standard, average-case scenario.

Here are three key types of scenarios you might model, illustrated using coin flips: 

• Best-case scenario: Your chosen side comes up every time in 100 coin flips.
• Most-likely scenario: Your chosen side comes up 50 times in 100 coin flips.
• Worst-case scenario: Your chosen side comes up zero times in 100 coin flips.

Scenario modelling is an incredible tool within equity management software, with founders, employees and investors benefitting from the information scenario modelling tools can unlock. 

The main difference between scenario modelling for equity vs generic scenario modelling is that equity scenarios are often linked to funding rounds and exit events, as opposed to generically tracking the success of a business. Let’s explore this further below.

Why is financial scenario modelling beneficial for equity management?

The main benefits of scenario modelling in equity management processes are future planning and projecting valuations for funding rounds or exit events. There are concrete benefits for founders, investors and employees.

Improve equity management for your growing business

Future planning is a vital tool for founders. Firstly, it allows founders to appropriately measure the size of their option pool and how it may be affected by potential growth in hiring. Secondly, it helps founders consider funding rounds and how dilution could affect the current shareholders.

Founders may also want to use projections to help them articulate the value of employee equity plans to talent during the hiring process. In a world where very few employees have experience with equity, it can be hard to convince potential hires that an equity plan holds significant value to them in the long run. Generally, talent acquisition teams would be in charge of communicating the benefit of share plans to potential new hires – do you feel like your hiring team has the tools and resources for effective equity communication?

In our H2 2024 Equity Data Pulse report we revealed that despite the lack of fundraising, employee equity pools had increased by 58% since 2023 for Series B businesses. This is just one of the interesting insights we explore in the report, but it highlights the significance of employee equity in today’s market.

For investors, scenario modelling makes it easier to identify risks and opportunities, as well as anticipate investment returns. With the correct cap table management software founders can configure the various views based on individual stakeholders, ensuring the correct information is available to those who need it.

Engage employees with scenario modelling

The projection of company valuations and exit events that scenario modelling provides is incredibly important for existing employees and potential new hires. Employees that are offered share options, or that participate in any other employee equity plans such as an EMI scheme, often consider the value of their shares when assessing their remuneration package. 

Being able to understand what an exit means for them and attributing a numerical value to their equity can be motivational and help organisations retain or attract talent. Given the moving parts, having a digestible dashboard for employees can simplify the communication process. Ledgy enables employees to see their equity stake, vesting schedule, vesting conditions and all other information regarding their equity.

In Ledgy, scenario modelling enables employees to evaluate the value of their equity based on various valuations, they can see today’s value and test future values based on their inputs. Alternatively, they can see how conservative, moderate or aggressive scenarios might play out. These can be adapted and shared by the founders, company secretaries or rewards teams. And they can do this all in one dashboard with Ledgy, see the example below:

Optimise equity management with Ledgy

With Ledgy, you can say goodbye to spreadsheets of endless, confusing rows and columns. That means no more guessing which cells are connected in complex sheets or worrying if your cap table is up-to-date and error-free. We’ve replaced the traditional scenario modelling system with modern, sleek and – most importantly – accurate software that does all the heavy lifting for you.

Simply input the scenarios you would like to view or share with stakeholder groups and Ledgy will crunch the numbers, create the formulas and connect the dots, so you can focus on taking your business to new heights. 

Whether you’re preparing for an audit, receiving a company valuation or enhancing employee satisfaction with a new equity plan, Ledgy has you covered.