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# 6.4 equity math

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A basic treatise that goes through the math regarding stock ownership as a company is founded up through IPO. Very simplistic model that assumes rising prices throughout.

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### 6.4 equity math

1. 1. Equity Math This presentation is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this presentation are the sole responsibility of Rick Rasmussen and do not necessarily reflect the views of USAID or the United States Government.
2. 2. STARTUP COMPANY EQUITY MODEL The Expanding Pie I. Formation of Company Founders A, B and C each purchase 2,000,000 shares of Common Stock at a purchase price of \$.001 per share. Person No.of Shares % of Shares Value Founder A 2,000,000 33.33% \$2,000 Founder B Founder A Founder B 2,000,000 33.33% \$2,000 33% 33% Founder C 2,000,000 33.33% \$2,000 \$2,000 \$2,000 Total Post-Financing Valuation 6,000,000 100.0% \$6,000 Founder C 33% \$2,000
3. 3. II. Hiring of Chief Executive Officer and Establishment of Option Plan The Company hires a CEO who purchases 2,000,000 shares of Common Stock \$.01 per share. Additionally, in order to attract additional key employees, the Company establishes an employee stock option plan and reserves 2,000,000 shares of Common Stock for issuance under this plan. The pre-financing valuation is \$60,000 and the post-financing ownership structure and valuation are depicted in the following table and pie chart. Person No. of Shares Percent of Shares Value Founder A 2,000,000 20.0% \$20,000 Founder B 2,000,000 20.0% \$20,000 Founder C 2,000,000 20.0% \$20,000 President 2,000,000 20.0% \$20,000 Stock Opt. Plan 2,000,000 20.0% \$20,000 100.0% \$100,000 Total Post-Financing 10,000,000 Valuation Founder B 20% \$20,000 Founder A 20% \$20,000 Stock Option Plan 20% \$20,000 Founder C 20% \$20,000 President 20% \$20,000
4. 4. III. Seed Round The Company needs capital to complete product development. Accordingly, the Company completes a \$1,000,000 venture capital financing at a purchase price of \$1.00 per share Pre-financing valuation of \$1,000,000 (10,000,000 shares with a value of \$0.10 per share). The shares sold in the financing are typical, venture capital Series A Preferred Stock with each share of Series A Preferred Stock being convertible into one share of Common Stock. Person No. of Shares Percent of Shares Value Founder A Founder B Founder C President Stock Opt. Plan 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 10.0% 10.0% 10.0% 10.0% 10.0% \$200,000 \$200,000 \$200,000 \$200,000 \$200,000 Series A Inv. 10,000,000 50.0% \$1,000,000 20,000,000 100.0% \$2,000,000 Total Post-Financing Valuation Founder A 10% President \$200,000 Founder B 10% 10% \$200,000 \$200,000 Stock Option Plan 10% \$200,000 Founder C 10% \$200,000 Series A Inv. 50% \$1,000,000
5. 5. IV. Series A Preferred Stock Financing An additional \$5,000,000 will be required to complete development plus sales and marketing. Accordingly, the Company undertakes a \$ 5,000,000 Series A Preferred Stock financing at a purchase price of \$0.50 per share, representing a pre-financing valuation of 10,000,000 (20,000,000 shares with a value of \$0.50 per share) Person No. of Shares Percent of Shares Stock Option Plan President 6.66% \$1,000,000 6.66% Value Founder A Founder B Founder C President Stock Opt. Plan 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 6.66% 6.66% 6.66% 6.66% 6.66% \$1,000,000 \$1,000,000 \$1,000,000 \$1,000,000 \$1,000,000 Series A Inv. 10,000,000 33.33% \$5,000,000 \$1,000,000 Founder A 6.66% \$1,000,000 Series A Inv. 33.3% \$5,000,000 Founder B 6.66% \$1,000,000 Founder C 6.66% \$1,000,000 Series B Inv. Total Post-Financing Valuation 10,000,000 30,000,000 33.33% \$5,000,000 100.0% \$15,000,000 Series B Inv. 33.3% \$5,000,000
6. 6. V. Initial Public Offering The Company decides to undertake an initial public offering. As a result of the offering, the shares of Series A and Series B Preferred Stock held by the venture capital investors will be automatically converted into Common Stock at the conversion rate of 1 share of Common Stock for each share of Preferred Stock, and all shares sold in the offering will be Common Stock. A total of 10,000,000 are to be sold by the Company. The shares will be sold at a price of \$2.50 per share, representing a pre-financing valuation of \$75,000,000 (30,000,000 shares with a value of \$2.50per share). Person No. of Shares Percent of Shares Value Founder A Founder B Founder C President Stock Opt. Plan 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 5% 5% 5% 5% 5% \$5,000,000 \$5,000,000 \$5,000,000 \$5,000,000 \$5,000,000 Series A Inv. 10,000,000 25% \$25,000,000 Series B Inv. 10,000,000 25% \$25,000,000 Public Investors 10,000,000 25% \$25,000,000 40,000,000 100.0% \$100,000,000 Total Post-Financing Valuation Series A Inv. 25% \$25,000,000 Founder C 5% \$5,000,000 Series B Inv. 25% \$25,000,000 Public Investors 25% \$25,000,000