8. PROPOSED SERIES A FUNDING
• $1M Financing
• $4M Pre-money valuation
• 20% option pool
8
9. 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
10. WHAT DO THE
FOUNDERS HAVE LEFT?
Brian Robert
Investment Option Pool
• Before:
• 2 equal co-founders
• After:
• 30% for each co-founder
10
11. AVOID DILUTION
Try a convertible note
• $500K note
Equity
• 10% warrant per month
• This converts at the
next financing round
Debt
11
12. 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
13. 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
14. 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
15. 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
16. TERMSHEET: OPTION 1
3x liquidation preference
• $1M Series A Financing
• $4M Pre-money valuation
• 20% option pool
16
17. 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
18. TERMSHEET: OPTION 2
Fully participating preferred
• $1M Series A Financing
• $4M Pre-money valuation
• 20% option pool
18
19. 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
20. 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
21. 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
22. 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
23. 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
24. 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
25. KNOW WHAT YOU
ARE AGREEING TO
01 Do the math
Think about incentives
02
at various outcomes
03 Know who has control
in important situations
