editione1.0.2
Updated August 29, 2023You’re reading an excerpt of Angel Investing: Start to Finish, a book by Joe Wallin and Pete Baltaxe. It is the most comprehensive practical and legal guide available, written to help investors and entrepreneurs avoid making expensive mistakes. Purchase the book to support the authors and the ad-free Holloway reading experience. You get instant digital access, commentary and future updates, and a high-quality PDF download.
The terms of the stock sale stipulated that the preferred stock investors would own 20% of the company on a fully diluted basis, and that at that time the option pool would represent 15% of the company on a fully diluted basis. Those conditions result in the cap table represented in Figure 7 below.
| Shares or Options | Issued and Outstanding | Fully Diluted | |
|---|---|---|---|
| Founders | 10,000,000 | 64.84% | 55.21% |
| Employees | 345,000 | 2.24% | 1.90% |
| Convertible Note Investors | 1,448,299 | 9.39% | 7.98% |
| Preferred Stock Investors | 3,628,708 | 23.53 | 20.00% |
| Issued and Outstanding | 15,422,007 | 100.00% | |
| Option Pool Available | 2,721,531 | 15.00% | |
| Total Fully Diluted | 18,143,538 | 100.00% |
You can see that our 18.75% option pool in Figure 5 has been diluted by the new investment as well, and is now at the target 15%.
So what is the price per share that the preferred stock investors paid? They spent $2M for 3,628,708 shares, or $0.55116 per share.
We started working through the impact of the preferred stock investment on the cap table by assuming that the note holders would be better off with the valuation cap conversion than the discount conversion, but let’s check.
If the noteholders had converted their $420K at the 20% discount, they would be paying $0.55116 multiplied by $0.80 per share, or $0.44093 per share. And $420K divided by $0.44093 is 952,532 shares.
Converting at the valuation cap generated 1,448,299 shares, so that was clearly the more advantageous conversion option.