1.Valuation: 2 types of valuations. pre-money and post-money. Postmoney = premoney + amount of cash invested
Company is worth €1 million pre and raises €500K.
How much is post-money valuation?
€1m + € 500K = €1,5 million
What % do investors own?
€ 500K /€1,5million = 33.3%
2. Liquidation Preferences: Specify who gets paid first in event of liquidation (like sale of company)
Preference: A certain multiple of the original investment is returned to the investor before the common stock receives any payment.
Investor has invested 1M for 30% with a liquidation preference 3X.
Company is sold for 4M.
Without preference he would get 30%*4M = 1,2M
With 3X preference he gets 3X1M = 3M
Participation: three varieties of participation
Full participation [more investor friendly]: Full Participating Preferred. The Series A investors will get a preferential payment equal to one times the “Original Purchase Price” of the Series A round
Capped participation: The “Cap” feature sets a limit on the multiple of return on invested capital that a series of Preferred Stock can receive before its participation feature is cancelled. For instance, if the Cap is set at two times (2x) invested capital, the Series holders would participate up until they receive two times the “Original Purchase Price” of that Series, after which they would not receive any further proceeds from the acquisition.
Non-participating [more entrepreneur friendly]: A Series of Preferred Stock that is non-participating will receive an amount equal to its percentage share of ownership in a Company (on an as-if converted to Common basis) in the case of an acquisition or winding up of the Company.
3. Antidilution: Protects an investor if at the next round you raise money at a lower valuation than the one you currently have.
Full ratchet = Investor does not dilute at all. More investor friendly.
Weighted average = Investor dilutes (not as much as entrepreneur) based on the amount of money raised in the past and being raised now. More entrepreneur friendly
4. Managers’ stock vesting: Vesting means that instead of founders getting their % immediately, they get it regularly over some period.
Example: If founders have 50% of company with a 4 year vesting, this means that after 1st year they have 50%/4 = 12,5%, after 2nd year 25%, 3rd year 37,5% etc.
5. Protective provisions: grant the investors the right to veto or block certain corporate actions.
Examples: strategy, sale of company, change of CEO