Liquidation Stack

Posted on 12. Sep, 2008 by in Graphical Examples

Investors refer to “down-side protection” a lot in funding startups. One way investors protect themselves is with Preferred Stock, which is dependent on the Liquidation Stack. The liquidation stack refers to the order in which shareholders are paid proceeds from a sale. Let’s look at the example shown on the right. First, let’s take the [...]

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Option Pool Creation

Posted on 17. Aug, 2008 by in Basics, Graphical Examples

One of the more subtle points of valuation is option pool creation. The first method is an option pool created from the pre-money side, but calculated on a post-money basis. The second is an option pool created from the post-money side, and calculated on a post-money basis. This is where a graphical example helps dramatically. [...]

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Convertible vs. Participating Preferred Stock

Posted on 04. Aug, 2008 by in Graphical Examples

Convertible Preferred Stock will either convert into common or stay as preferred (and take out its liquidation preference and dividend) in a exit event. For Participating Preferred Stock, the liquidation preference and dividends are taken out, and then converts into common. In common, the Participating Preferred Stock takes their ownership amount along with the other [...]

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Dividends

Posted on 04. Aug, 2008 by in Graphical Examples

Dividends are an extension of the Liquidation Preference. Dividends for early stage companies are not typically paid out until an exit event. When they are paid, such as when the company is acquired, they combine with the liquidation preference and are paid before any common shareholders receive proceeds. Let’s take an example. The increased number [...]

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Liquidation Preference

Posted on 31. Jul, 2008 by in Graphical Examples

Liquidation Preference is a multiple on the amount invested for a given round.  An example of an exit event (e.g. the company is sold) provides for the easiest explanation.  Let’s assume a company raised $2M on a $4M pre-money valuation.  After the financing the investors own 33% of the company’s outstanding shares.  However, if the [...]

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Price per share

Posted on 07. Jul, 2008 by in Graphical Examples

The key to understanding the price per share calculation is that the number of shares in the company is increased (shares are added) with each round of financing. When the pre-money valuation is set, divide it by the total number of shares (prior to financing) to calculate the price per share. To the right, we [...]

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Investment Amount

Posted on 07. Jul, 2008 by in Graphical Examples

The investment amount was briefly discussed in the article on pre-money valuation. However, another aspect needs to be fully understood when raising money in a competitive environment with large VC funds. This is that the pre-money valuation goes up with the amount of money raised if all other things are held constant. This is especially [...]

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Pre-money Valuation

Posted on 07. Jul, 2008 by in Graphical Examples

The first lever to understand is the pre-money valuation set on the company. Where does it come from? It is negotiated between the entrepreneur and investor (angel or venture capitalist). What is it based on? It depends on the stage the company is in, as well as the industry the company is entering. The simplest [...]

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