8. PROPOSED SERIES A FUNDING
• $1M Financing
• $4M Pre-money valuation
• 20% option pool
8
9. HOW TO CALCULATE DILUTION
Step 1:
Determine post
money valuation
9
10. HOW TO CALCULATE DILUTION
Step 1:
Determine post
money valuation
Money invested
+ Pre-Money
Post-Money Value
9
11. HOW TO CALCULATE DILUTION
Step 1: Step 2:
Determine post Determine investor
money valuation ownership
Money invested
+ Pre-Money
Post-Money Value
9
12. HOW TO CALCULATE DILUTION
Step 1: Step 2:
Determine post Determine investor
money valuation ownership
Money invested Money invested
+ Pre-Money
÷ Post-Money
Post-Money Value Investor Ownership
9
13. HOW TO CALCULATE DILUTION
Step 1: Step 2: Step 3:
Determine post Determine investor negotiate
money valuation ownership employee
option pool
Money invested Money invested
+ Pre-Money
÷ Post-Money
Post-Money Value Investor Ownership
9
14. HOW TO CALCULATE DILUTION
Step 1: Step 2: Step 3:
Determine post Determine investor negotiate
money valuation ownership employee
option pool
Money invested Money invested
+ Pre-Money
÷ Post-Money
Post-Money Value Investor Ownership
Investor Ownership
+ Option Pool
= Dilution
9
15. WHAT DO THE
FOUNDERS HAVE LEFT?
Brian Robert
• Before:
• 2 equal co-founders
• After:
• 30% for each co-founder
10
16. WHAT DO THE
FOUNDERS HAVE LEFT?
Brian Robert
Investment
• Before:
• 2 equal co-founders
• After:
• 30% for each co-founder
10
17. WHAT DO THE
FOUNDERS HAVE LEFT?
Brian Robert
Investment Option Pool
• Before:
• 2 equal co-founders
• After:
• 30% for each co-founder
10
18. AVOID DILUTION
Try a convertible note
• $500K note
Equity
• 10% warrant per month
Debt
11
19. AVOID DILUTION
Try a convertible note
• $500K note
Equity
• 10% warrant per month
• This converts at the
next financing round
Debt
11
20. FIND A COMPROMISE ON PRICE
Convertible Debt
Other benefit is... less paperwork
• Fewer terms to negotiate
• Faster
You need to realize...
• Investors want a lower price
• Creates overhang on next financing round
12
21. THE COST OF CONVERTIBLE DEBT
After 6 months:
• $1M Series A
• Pre-money valuation of $4M
• 20% option Pool
Post-Money Value
13
22. THE COST OF CONVERTIBLE DEBT
After 6 months:
• $1M Series A
Pre-Money $4M
• Pre-money valuation of $4M
• 20% option Pool
Post-Money Value
13
23. THE COST OF CONVERTIBLE DEBT
After 6 months:
• $1M Series A
Pre-Money $4M
• Pre-money valuation of $4M
Series A $1M
• 20% option Pool
+
Post-Money Value
13
24. THE COST OF CONVERTIBLE DEBT
After 6 months:
• $1M Series A
Pre-Money $4M
• Pre-money valuation of $4M
Series A $1M
• 20% option Pool Notes $500K
+
Post-Money Value
13
25. THE COST OF CONVERTIBLE DEBT
After 6 months:
• $1M Series A
Pre-Money $4M
• Pre-money valuation of $4M
Series A $1M
• 20% option Pool Notes $500K
+ Warrants $300K
Post-Money Value
13
26. THE COST OF CONVERTIBLE DEBT
After 6 months:
• $1M Series A
Pre-Money $4M
• Pre-money valuation of $4M
Series A $1M
• 20% option Pool Notes $500K
+ Warrants $300K
Post-Money Value $5.8M
13
27. THE COST OF CONVERTIBLE DEBT
After 6 months:
• The note cost 13.8%
of the company Option Pool
20% Robert
• This is an addition 11% vs the Note
24.5%
8.6%
original series A termsheet
Warrants
5.2% Brian
24.5%
Series A
17.2%
14
28. EQUITY MEANS EVERYONE
IS ON THE SAME TEAM
• Investors and founders want to
maximize the value of the company
Be careful of...
• Dilution
• Have to negotiate a lot of important terms
15
29. TERMSHEET: OPTION 1
3x liquidation preference
• $1M Series A Financing
• $4M Pre-money valuation
• 20% option pool
16
31. LIQUIDATION PREFERENCE
EVENTUALLY GOES AWAY
$1M Series A at $4M Pre with 3X liquidation pref
Acquisition Founders and
Price it works:
How Employees get:
@ $3M$3M
First goes to investors
$0
17
32. LIQUIDATION PREFERENCE
EVENTUALLY GOES AWAY
$1M Series A at $4M Pre with 3X liquidation pref
Acquisition Founders and
Price it works:
How Employees get:
@ $3M$3M
First goes to investors
$0
@ $5M $2M (40%, not 80%)
@ $15M $12M (80% - inflection pt)
17
33. LIQUIDATION PREFERENCE
EVENTUALLY GOES AWAY
$1M Series A at $4M Pre with 3X liquidation pref
Acquisition Founders and
Price it works:
How Employees get:
@ $3M$3M
First goes to investors
$0
@ $5M $2M (40%, not 80%)
@ $15M $12M (80% - inflection pt)
17
34. TERMSHEET: OPTION 2
Fully participating preferred
• $1M Series A Financing
• $4M Pre-money valuation
• 20% option pool
18
35. PARTICIPATION IS NOT
AN ISSUE AT LARGE EXITS
$1M Series A at $4M Pre with participating preferred
How it works:
Take $1M off the top then take 20% of what’s left
19
36. PARTICIPATION IS NOT
AN ISSUE AT LARGE EXITS
$1M Series A at $4M Pre with participating preferred
Acquisition Founders and
Price it works:
How Employees get:
@ $3M$1M
Take off $1.6Mtop then take 20% of what’s left
the (53%)
19
37. PARTICIPATION IS NOT
AN ISSUE AT LARGE EXITS
$1M Series A at $4M Pre with participating preferred
Acquisition Founders and
Price it works:
How Employees get:
@ $3M$1M
Take off $1.6Mtop then take 20% of what’s left
the (53%)
@ $5M $3.2M (64%)
@ $15M $11.2M (75%)
19
38. PARTICIPATION IS NOT
AN ISSUE AT LARGE EXITS
$1M Series A at $4M Pre with participating preferred
Acquisition Founders and
Price it works:
How Employees get:
@ $3M$1M
Take off $1.6Mtop then take 20% of what’s left
the (53%)
@ $5M $3.2M (64%)
@ $15M $11.2M (75%)
19
39. THIS IS WHAT YOU WANT
1x liquidation preference
• $1M Series A Financing
• $4M Pre-money valuation
Interests
• 20% option pool
Align Incentives
• The investor interests are
very similar to yours
Common Investor
20
40. SINGLE LIQUIDATION PREFERENCE
$1M Series A at $4M Pre with 1X liquidation pref
Acquisition Founders and
Price Employees get:
@ $3M $2M (66%)
@ $5M $4M (80%)
@ $15M $12M (80%)
21
41. SINGLE LIQUIDATION PREFERENCE
$1M Series A at $4M Pre with 1X liquidation pref
Acquisition Founders and
Price Employees get:
@ $3M $2M (66%)
@ $5M $4M (80%)
@ $15M $12M (80%)
21
42. SINGLE LIQUIDATION PREFERENCE
$1M Series A at $4M Pre with 1X liquidation pref
Acquisition Founders and
Price Employees get:
@ $3M $2M (66%)
@ $5M $4M (80%)
@ $15M $12M (80%)
21
43. DON’T OVER-OPTIMIZE
• Lower the valuation
• Last money in is the first
money out
• Terms only get
worse over time
YOUR COMPANY
44. DON’T OVER-OPTIMIZE
• Lower the valuation
• Last money in is the first
money out
• Terms only get
worse over time
$1 M
YOUR COMPANY
45. DON’T OVER-OPTIMIZE
• Lower the valuation
• Last money in is the first
money out
• Terms only get
worse over time
$5 M
$1 M
YOUR COMPANY
46. DON’T OVER-OPTIMIZE
• Lower the valuation
• Last money in is the first
money out
• Terms only get $20 M
worse over time
$5 M
$1 M
YOUR COMPANY
47. DON’T OVER-OPTIMIZE
• Lower the valuation
• Last money in is the first $100 M
money out
• Terms only get $20 M
worse over time
$5 M
$1 M
YOUR COMPANY
48. DON’T OVER-OPTIMIZE
• Lower the valuation
• Last money in is the first
money out
• Terms only get
worse over time
$100M
$20 M
YOUR COMPANY
$5 M
$1
49. RAISE ENOUGH MONEY
TO REACH YOUR MILESTONES
Flat rounds & down rounds are now common
70%
53%
35%
18%
0%
Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009
Source: Cooley Godward Kronish LLP
• Understand the effects of anti-dilution
23
50. CONTROL YOUR OWN DESTINY
• Board composition
Investors Founders
• Voting rights/thresholds
Visualization: Board room
table –Would need to purchase.
removing founders,
removing board members
24