TL;DR: Once you’re ready to raise a “real” equity round, such as Series Seed or Series A, use Excel to consider the effects of an option pool increase and the conversion of your SAFEs and convertible notes.
Download the open-source cap table and the example spreadsheet.
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As I discussed in the previous section (02 SAFEs and Convertible Notes), modeling a preferred equity financing is straightforward in theory. Investor and issuer agree on a pre-money valuation and the size of the round, then the price per preferred share is calculated by dividing the pre-money valuation by the issuer’s pre-money capitalization. But this can get complicated quickly depending on what constitutes “pre-money capitalization.” For purposes of this section, I’ll call the first equity round Series A, but it might also be called Series Seed, Series 1, or some other name. I’ll call SAFEs and convertible notes “convertible securities” or “converting securities” and their holders the “seed investors.”
In the last section, we covered the fact that most of the time, Series A investors will insist that converting securities not dilute the Series A. That means the conversion shares must be treated as though they were outstanding for purposes of calculating the Series A price per share. The same is true for option pool expansion. Series A investors understand that an influx of capital usually means hiring, and hiring means option grants. You’ll work with your investors to figure out an appropriate size of the unallocated portion of the pool, but however big or small it is, all shares reserved for the pool immediately after closing must be treated as outstanding for purposes of calculating the Series A price.
That requires circularity in Excel, so be sure circular calculations are turned on before modeling a pool expansion in connection with an equity round. I’ve found that the most straightforward way to approach this is as follows:
Step One: In a table separate from your main cap table (such as the “Series A Inputs and Calculations” tables in the example spreadsheet), create a basic Series A model with Pre-money Valuation, New Money, and Target Available Pool (% Fully Diluted) as inputs, highlighted in peach to show that they’re inputs. Add Pre-money Capitalization as a reference to the fully diluted number of shares from your cap table and New-money Price and Fully Diluted Post-money Shares as an output (Pre-money Valuation / Pre-money Capitalization).
Step Two: Create a reference to the Current Available Pool pulled from your cap table. E.g., if your overall pool size is 333,333 and you’ve granted 103,332 options, the remaining 230,001 unallocated shares would be your current available pool.
Step Three: Add zero as a placeholder for Target Available Pool (Shares).
Step Four: Add a formula for Pool Shares Added that subtracts Current Available Pool from Target Available Pool (Shares).
Step Five: Modify your formula for Pre-money Capitalization from above so that it adds Pool Shares Added to the total.
Step Six: Replace the placeholder for Target Available Pool (Shares) with the formula [Target Available Pool (% Fully Diluted)] * [Fully Diluted Post-money Shares]. That should result in the appropriate circular calculation to figure out how many shares you need to add to the pool to end up with the agreed-upon available pool post-closing.
For the raw numbers to be useful, you’ll want to see a bird’s-eye view of the post-financing cap table and a breakdown of individual holders in as much detail as you want. For a quick summary, you can divide the aggregate number of shares held by groups (such as the founders, the seed investors, the option pool, the Series A investors) by the Fully Diluted Post-money Shares. Using the fully diluted share number as a denominator doesn’t really reflect the liquidation waterfall if the company were sold that day or the exact voting power of the shares, but it’s the way founders should, and investors do, think about their ownership percentage.
If you want a detailed breakdown, you can either make a similar separate chart, or you can just add a layer to the original cap table showing the conversion of the converting securities, the new money shares purchased by the Series A investors, and the pool expansion. Many investors will ask for this as part of the disclosure schedule in a Series A stock purchase agreement, meaning that the issuer promises that the investors will be getting exactly the number of shares and fully diluted percentages shown on the disclosure.
Lawyer note: As discussed in the last section, SAFEs and convertible notes often convert at lower prices relative to what the new-money investors are paying. Each different price translates into a different subseries of preferred stock. For example, in a Series A round, the new money might be called Series A-1, SAFE conversions at two different valuation caps might be called Series A-2 and Series A-3, and a note conversion at a discount might be Series A-4. This is important for ensuring that the liquidation preference for preferred stock (i.e., the amount that each share of preferred stock is entitled to receive in an exit in preference to the common stock if the preferred does not convert to common) matches what was actually paid, so that the lower-priced shares do not receive a windfall in an exit. That is a different concept from priority of payment – within the same round, conversion shares and new-money shares will be pari passu, meaning no subseries is paid before the others.
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