Professional Documents
Culture Documents
Week 3
Week 3
Week 3
Exercise 1:
$8,000,000
A higher valuation cap is better, but only until it exceeds the pre-money valuation, after which the
valuation cap has no effect.
Exercise 2:
7% more ownership than what you would have if you went with the “standard” terms.
3% more ownership than “standard” terms but 4% lesser than your counter offer.
Lowest possible pool size based on hiring plans is ideal. Common stockholders pay for the option pool
completely, so every bit matters.
Exercise 3:
Never:
Preferred stock in this case is always more valuable than common stock.
$20M:
We assume that the reserved option pool will be completely unused at the time of exit.
If all shares reserved in the (20%) option pool are unissued at exit, the option pool collapses and all
shareholders benefit from it pro rata. The investor's ownership increases to 25% (Before, investor
owned 20 per 100 shares. After option pool collapses, investor owns 20 per 80 shares = 25%). Thus, they
get a better deal by converting to Common at any exit higher that $20M (Eg. 25% of $21M = $5.25M,
which is greater than the investor's preference proceeds $5M).
$40M
Here, effective valuation is the lowest value between the pre-money valuation or the valuation cap. And
instrument conversion capitalization is calculated as below:
capitalization (pre-money conversion) = Sum of all issued stock, options and warrants pre-money +
Unissued shares reserved in the newly allocated option pool + sum of all shares from converting
instruments
or,
capitalization (post-money conversion) = Sum of all issued stock, options and warrants pre-money +
Unissued shares reserved in the newly allocated option pool
In our example: