Over the years I’ve had many occasions to figure out the price of an offering of preferred stock for a typical venture funded startup.
This is different from, and definitely not to be confused with, the valuation of the company on a pre-money basis. That’s a topic for a later post.
In its most simple form, the price for a share of preferred stock is calculated just like that: dollars per share.
In this case, the dollars equals the total pre-money valuation of the company. And shares equals the total fully diluted capitalization of the company. (By fully diluted, we mean the total number of shares issued and outstanding, assuming the conversion or exercise of all convertible or exercisable securities into shares of common stock. This includes the entire option pool, but not any merely authorized shares of stock in the company’s articles or certificate of incorporation.)
The spreadsheet (http://wp.me/awFFX-ho) is a simple summary cap table. It’s pretty self-explanatory, and I’ve always felt it’s better than explaining what happens in words. I’ve described venture math and dilution literally over a few hundred times. Showing is easier.
Simply put: the money from the new investors goes into the company’s checking account. The value of the company after the round is equal to the value before plus the value of the new investment.
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