The document discusses key concepts related to share classes, options, dilution, and issued versus fully diluted shares in the context of company financing. It uses Airbnb as an example to illustrate how a new class of shares could be created for investors and an option pool established for employees, which would increase total shares and thereby dilute existing shareholders.

1. 2. Key Concepts

2. 2
Key Concepts – Share Classes
• Key variables:
- Voting rights
- Liquidation preference
- Price
- Right to dividends
Points to note
- It is possible to create a new class of shares and attach any specific
rights or privileges to it
- The actual legal rights of share classes are given in the Articles of
Association
- Options normally convert into the lowest class of shares – CHECK THIS
- In the Airbnb example, the new investors could have invested into a new
class of B Shares with the founders holding A Shares
Total A
Shares
Total B
Shares
Total
Shares
Issued % Fully
Diluted %
Founders
Brian Chesky 1,000 - 1,000 25.00% 25.00%
Joe Gebbia 1,000 - 1,000 25.00% 25.00%
Nathan Blecharczyk 1,000 - 1,000 25.00% 25.00%
Founder Subtotal 3,000 - 3,000 75.00% 75.00%
Investors
Angel 1 0 500 500 12.50% 12.50%
Angel 2 0 350 350 8.75% 8.75%
Angel 3 0 150 150 3.75% 3.75%
Investors Subtotal 0 1,000 1,000 25.00% 25.00%
Options - -
Option Pool-Existing - - 0.00%
Option Pool - New - - 0.00%
Options Subtotal - - - 0.00%
Total 3,000 1,000 4,000 100% 100%
Post investment

3. 3
Key Concepts - Options
• Options are a way of awarding shares to non-investors
• People are given the “option” to buy a share at a given price under given circumstances
• The most common use of options is for employees e.g. Employee Management Incentive
(EMI)
• The intention is to align the interests of the staff and investors e.g a big exit for the
business is good for everyone
Key terminology:
• Strike price – price you have to pay for each share to exercise the option. Normally lower
than market price for a share. See it as a discounted price for staff.
• Unallocated – a specific number of options have been created but not given to anyone
• Allocated – a specific number of options have been created and have been ear-marked
for specific people
• Vested – even if you are entitled to buy options at a strike price you may have to wait
until you can “exercise” this right. This normally incentivises staff to remain in their job
and see the options as a long-term incentive. Vested shares are where the option holder
is able to exercise them
• Granted – Once the shares have vested, and the strike price is paid, they are granted

4. 4
Key Concepts - Options
• The new investors into Airbnb want to create an option pool for new
hires
• They decide this should be 400 shares
• This is the equivalent of 9.09% of Airbnb Inc. (= 400 / 4,400)
• These shares are created but held back (ie unallocated options)
A Ords Issued basis
%
Fully
Diluted %
New Money
Invested
New B Ord
Shares
New
Options - A
Ords
Total A
Ords
Total B
Ords
Total
Shares
Issued % Fully
Diluted %
Founders
Brian Chesky 1,000 33.33% 33.33% 1,000 - 1,000 25.00% 22.50%
Joe Gebbia 1,000 33.33% 33.33% 1,000 - 1,000 25.00% 22.50%
Nathan Blecharczyk 1,000 33.33% 33.33% 1,000 - 1,000 25.00% 22.50%
Founder Subtotal 3,000 100.00% 100.00% 3,000 - 3,000 75.00% 67.51%
Investors
Angel 1 0 0.00% 0.00% 500,000£ 500.00 0 500 500 12.50% 11.25%
Angel 2 0 0.00% 0.00% 350,000£ 350.00 0 350 350 8.75% 7.88%
Angel 3 0 0.00% 0.00% 150,000£ 150.00 0 150 150 3.75% 3.38%
Investors Subtotal 0 0.00% 0.00% 1,000,000£ 1,000.00 0 1,000 1,000 25.00% 22.50%
Options - -
Option Pool-Existing 0 0.00% - - 0.00%
Option Pool - New 0 0.00% 444 444 444 9.99%
Options Subtotal 0 0.00% -£ 444 - 444 9.99%
Total 3,000 100% 100% 1,000,000£ 1,000.00 3,444 1,000 4,444 100% 100%
Post investment (with options)New Investment

5. 5
Impact of Options
• With the additional option
pool the total number of
shares post-investment
increase
• This reduces the total
ownership stake of all
shareholders
• E.g Angel 1 owns 12.5%
of Airbnb with no option
pool or 11.25% when a
9.99% additional option
pool is created
Total A
Ords
Total B
Ords
Total
Shares
Issued % Fully
Diluted %
Total A
Shares
Total B
Shares
Total
Shares
Issued % Fully
Diluted %
Founders
Brian Chesky 1,000 - 1,000 25.00% 22.50% 1,000 - 1,000 25.00% 25.00%
Joe Gebbia 1,000 - 1,000 25.00% 22.50% 1,000 - 1,000 25.00% 25.00%
Nathan Blecharczyk 1,000 - 1,000 25.00% 22.50% 1,000 - 1,000 25.00% 25.00%
Founder Subtotal 3,000 - 3,000 75.00% 67.51% 3,000 - 3,000 75.00% 75.00%
Investors
Angel 1 0 500 500 12.50% 11.25% 0 500 500 12.50% 12.50%
Angel 2 0 350 350 8.75% 7.88% 0 350 350 8.75% 8.75%
Angel 3 0 150 150 3.75% 3.38% 0 150 150 3.75% 3.75%
Investors Subtotal 0 1,000 1,000 25.00% 22.50% 0 1,000 1,000 25.00% 25.00%
Options - - - -
Option Pool-Existing - - 0.00% - - 0.00%
Option Pool - New 444 444 9.99% - - 0.00%
Options Subtotal 444 - 444 9.99% - - - 0.00%
Total 3,444 1,000 4,444 100% 100% 3,000 1,000 4,000 100% 100%
Post investment (no options)Post investment (with options)

6. 6
Key Concepts – Issued vs Fully Diluted
• Total ISSUED SHARES does not include any options and warrants
• Total FULLY DILUTED shares does include options and warrants
• Post investment an option pool is created – this only affects the Fully Diluted %. The
Issued % is not affected by options
• Pre-investment there was no option pool so Issued % was equal to Fully diluted %
• Fully diluted % reflects the minimum % ownership a shareholder will experience
A Ords Issued basis
%
Fully
Diluted %
Total A
Ords
Total B
Ords
Total
Shares
Issued % Fully
Diluted %
Founders
Brian Chesky 1,000 33.33% 33.33% 1,000 - 1,000 25.00% 22.50%
Joe Gebbia 1,000 33.33% 33.33% 1,000 - 1,000 25.00% 22.50%
Nathan Blecharczyk 1,000 33.33% 33.33% 1,000 - 1,000 25.00% 22.50%
Founder Subtotal 3,000 100.00% 100.00% 3,000 - 3,000 75.00% 67.51%
Investors
Angel 1 0 0.00% 0.00% 0 500 500 12.50% 11.25%
Angel 2 0 0.00% 0.00% 0 350 350 8.75% 7.88%
Angel 3 0 0.00% 0.00% 0 150 150 3.75% 3.38%
Investors Subtotal 0 0.00% 0.00% 0 1,000 1,000 25.00% 22.50%
Options - -
Option Pool-Existing 0 0.00% - - 0.00%
Option Pool - New 0 0.00% 444 444 9.99%
Options Subtotal 0 0.00% 444 - 444 9.99%
Total 3,000 100% 100% 3,444 1,000 4,444 100% 100%
Pre investment Post investment (with options)

7. 7
Key Concepts - Dilution
• Dilution = Total New Shares / Post investment shares
• If an option pool is created this is included within the Total New Shares
• New Shares = 1,000 (invested) + 444 (options)
• Post-investment shares = 4,444
• Dilution (with option pool) = 1,444 / 4,444 = 32%
• Dilution (no option pool) = 25%
A Ords Issued basis
%
Fully
Diluted %
Total A
Ords
Total B
Ords
Total
Shares
Issued % Fully
Diluted %
Founders
Brian Chesky 1,000 33.33% 33.33% 1,000 - 1,000 25.00% 22.50%
Joe Gebbia 1,000 33.33% 33.33% 1,000 - 1,000 25.00% 22.50%
Nathan Blecharczyk 1,000 33.33% 33.33% 1,000 - 1,000 25.00% 22.50%
Founder Subtotal 3,000 100.00% 100.00% 3,000 - 3,000 75.00% 67.51%
Investors
Angel 1 0 0.00% 0.00% 0 500 500 12.50% 11.25%
Angel 2 0 0.00% 0.00% 0 350 350 8.75% 7.88%
Angel 3 0 0.00% 0.00% 0 150 150 3.75% 3.38%
Investors Subtotal 0 0.00% 0.00% 0 1,000 1,000 25.00% 22.50%
Options - -
Option Pool-Existing 0 0.00% - - 0.00%
Option Pool - New 0 0.00% 444 444 9.99%
Options Subtotal 0 0.00% 444 - 444 9.99%
Total 3,000 100% 100% 3,444 1,000 4,444 100% 100%
Pre investment Post investment (with options)