A list of “who owns what” in a company. Typically shows a fully diluted and outstanding ownership percent of each stakeholder, often includes an breakdown of ownership by each share class, equity incentive plan, and warrants.
The number of shares issued by the company to shareholders. Outstanding options and warrants are not counted until they are exercised, and does not include shares repurchased by the company.
Funding round (priced round or investment round) is a round of investment, by which a company raises money from institutional investors, venture capitalists, private equity, etc. It consists of a defined pre-money valuation.
The valuation of the company prior to the investment from a funding round.
Post-money valuation is the valuation of the company after a funding round. It is equal to pre-money valuation plus value of new equity issued. The value of the new equity issued is equal to the new investment, but can defer slightly by dollars when rounding up partial shares.
post_money_valuation = pre_money_valuation + new_investment
post_money_valuation = new_investment * total_post_investment_shares_outstanding / new_shares_issued
Referred to as stock. Represents ownership in a company.
A specified type of security that represents an interest or equity in a company. Companies with multiple share classes confer with different preferences. Typically in a startup, investors will ask for preferred shares while founders and employees get common shares.
Class of shares typically owned by the founders and employees of a company. This class of share doesn't receive the same preferences as preferred shares. In a liquidation event, common shares are the last to receive money, after debt holders and preferred share holders.
Shares typically owned by investors of a company due to higher priority and preferences in a liquidation event. Preferred shares can have liquidation preferences, anti-dilution protection, and priority in dividend payments, which help investors get higher returns and protect their investment. Generally the last in has first priority on returns at a change of control.
Additionally, at the time of liquidation, convertible preferred share convert to common shares at a specified conversion ratio.
Number of common stocks received for a converted perferred stock; used for 'as-converted basis.' Typically at a start up the ratio is 1:1.
Terms to specify what investors get paid in the event of a liquidation, a sale or acquisition of a company.
Entitles preferred share holders to receive [0.00]x of the original investment before common stock holders.
With a 1x multiple, investors will receive their $1M and the remaining $1M will be further distributed. Without a multiple, their pro rata ownership would entitle them to just $400K.
With a 1x multiple, investors will receive $500K and the remaining share holders get nothing.
Since investors will receive more than their $1M invested, the shares will convert and the multiple won't matter. Investors will receive $1.6M and the remaining $6.4M will be distributed to other share holders.
Enables investors to recieve the value of their initial investment before further distribution, and then gets to participate in the remaining proceeds based on ownership percentage.
With participating preference, investors will receive a total of $1.2M; $1M of the total investment plus 20% of the remaining $1M which is $200K. The remaining $800K would remain for distribution.
With participating preference, investors will received $500K and the remaining share holders get nothing.
With participating preference, investors will receive a total of $2.4M; $1M to match investment plus 20% of the remaining $7M which is $1.4M.
A cap set to limit the amount received by preferred shares; typically it is a multiple of the original investment, 2x or 3x.
With a 2x cap on participating preference, investors will receive a total of $2M instead $2.4M without a cap (see in the example above).
Since investors would receive more based on ownership percent, $4M, than with a 2x cap on participating preference, $2M, investors will convert and receive the $4M instead.
Asked for in preferred shares when investors worry the next round will have lower price per share than what they paid for. Two common types of anti-dilution protection: full rachet & weighted average.
Investors purchase preferred shares that convert to common shares on a one-to-one basis (same price paid for preferred shares). When anti-dilution protection is implemented, it adjusts the conversion_price.
The conversion price will be lowered to the price per share at which the new shares are issued.
new_conversion_price = new_price_per_share
The most common anti-dilution protection. Founder's are better off with weighted average than full rachet.
new_conversion_price = old_conversion_price * ( outstanding_common_shares_prior_to_issuance + new_invested_capital ) / (outstanding_common_shares_prior_to_issuance + new_shares_issued)
The "outstanding_common_shares_prior_to_issuance" in the weighted average calculation includes all shares of common, preferred (as converted to common), issued options, options reserved in option plan, and warrants.
The "outstanding_common_shares_prior_to_issuance" in the weighted average calculation refers to the number of shares of the preferred class that is being adjusted.
An investment method typically used in a seed round to delay a valuation of a company. Convertibles are meant to convert into equity at the specified milestone, generally at the next funding round. To compensate investors for taking an early risk, convertibles will have terms such as valuation cap, discount, warrant coverage and interest.
A ceiling on price holders pay to convert to shares. It allows to holders to convert into equity at the lower of the pre-money valuation of the new round or the valuation cap. In cases where valuation cap is reached, holders get the lower of the price per share determined by the discount or the valuation cap price.
A set percentage reduction off of price per share of the next funding round where a convertible note converts. Discounts typically range from 0% to 30%, mostly common being around 20%. In cases when the valuation cap is reached, investors get the lower of the price per share determined by the discount or the valuation cap price.
The fixed due date for repayment of the principle plus accrued interest. Typically ranges from 12-24 months, most common being around 18 months from date of issuance. If maturity date is reached and an event has not triggered conversion, depending on the terms, the notes can be converted automatically to existing share class or an extension can be negotiated.
Referred to as Option Plan, Option Pool, or ESOP (Employee Stock Option Plan)
A percentage of equity reserved to compensate, retain, and attract employees; a contact between the company and employees allowing the employee to buy a specific number of shares within a given period of time at the exercise price. Employees benefit by being able to buy shares at the exercise price and selling at the higher trading price.
Equity Incentive Plans generally have a term period of 10 years. After the term period is reached another equity incentive plan is created for employees, the old plan cannot extend its term period.
At the time of a funding round, investors require that the option plan be a certain percentage of the post-money fully diluted shares.
Create a hiring plan for the period until the next financing round; this can help lower the number of options in the option plan, thus increasing the effective pre-money valuation. Discuss this with investors during negotiations.
Further reading: Venture Hacks: Option Pool Shuffle
The right, but not obligation, to buy a specified number of shares at the exercise price. Once the option is exercised, the employer is obligated to grant shares to its employees at its exercise price. Options are given to employee or consultant for compensatory purposes.
Employee stock options that can be granted to employees and have U.S. tax benefits. If shares are held for 2 years from grant date and 1 year from exercise date, the profits made on the sale are subject to long term capital gains tax, in comparison to the much higher income tax.
If companies allow you to exercise options after 90 days since termination, your ISOs convert into NSO and are subject to different tax rules.
ISO Requirements: + Must be an employee during the term of the ISO. + Must exercise options while an employee, or exercise within grace period max of 3 months following termination. If termination due to disability, can be exercised within max 1 year grace period. If termination due to death, can be exercised by the legal heirs of the deceased until the expiration date. Grace periods differ by company but cannot exceed maximums. + Cannot be exercised by anyone other than holder, unless in the case of death + Cannot be transferred by equity holder, other than will or law of descent + Exercise price cannot exceed fair market value of underlying stock + Exercisable within 10 years of grant date, 5 years if greater than 10% ownership + Fair market value of stock exercisable for the first time cannot exceed $100,000, options over $100K limit are treated as NSO + If at time of grant holder owns more than 10% of voting power of outstanding shares, exercise price of ISO must be 110% of fair market value of stock and term cannot be longer than 5 years + ISOs have to be specified under an equity incentive plan, must be a written document that adequently establishes terms + Plan must specify number of shares that may be issued as ISOs + Plan must specify classes of employees that can benefit from equity incentive plan + Equity incentive plan cannot extend beyond 10 years earlier of plan adoption date or shareholder approval date + Granted within 10 years earlier of adoption or shareholder approval of equity incentive plan
Unlike ISOs, at the date of exercise, the difference between the exercise price and fair market value on that date results in additional taxable income, much higher than the long term capital gains tax.
Shares that are not fully transferrable from company to individual granted shares until conditions, such as vesting, are met. Generally used as a form of employee compensation due to favorable accounting and tax benefits.
A valuation of the company to determine the fair market value of the common stock to the set the exercise price of employee equity. If an ISO, one can avoid tax penalities that would otherwise be incurred if exercise price is lower than fair market value. Though not required, it is highly recommended for companies to get a 409a valuation.
409a refers to Section 409a of the Internal Revenue Code.
Further reading: IRS - 409a
The right, but not obligation, to buy a specified number of shares at the exercise price. Similar to options but are given to investors, typically associated with investment transactions rather than compensatory purposes.
A predetermined price to buy shares. It is common practice to set the exercise price to the fair market value of the share to be issued at the date option was granted.
A process used to allow employee and founders to earn their equity over a period of time or upon completion of milestones. This helps insure that individuals make a contribution towards the growth of the company. The most common employee vesting schedule is a 4 year vest with a one year cliff. It isn’t uncommon for VPs or executive vesting be based on milestones such as 100K in deliverables or 2M in EBITA.
Much like the name implies, a percent of options vest on the day of the grant date.
The option grant holder would immediately vest 1,000 options on Jan 1, 2015.
A time at the beginning of a vesting period where equity is vested at the end rather than gradually. A 1 year cliff, example below, is commonly used by company to insure that only employees who have made a meaningful contribution can own equity.
During the period between Jan 1, 2015 to Jan 1, 2016 no shares vests. On Jan 1, 2016, 2,500 shares vest since the one year cliff is reached.
Upon change of control (acquisition, merger, sale, etc), a given percent of the unvested shares will immediately vest. It is typical for founders to have a single trigger acceleration agreement of 100%, and between 25% to 50% for executives and key employees.
After a change of control, of the 5,000 options unvested, 1,250 options will immediately vest due to single trigger acceleration. The remaining 3,750 options will be forfeited.
Upon change of control (acquisition, merger, sale, etc), if an individual is terminated without cause or resigns for a good reason, a given percent of the unvested shares will immediately vest. Typically for employees to accelerate 50% to 100% of their unvested shares. This provides a safety net for employees and aligns the interests of founders, investors and acquirers.
After a change of control and termination without cause, of the 5,000 options unvested, 2,500 options will immediately vest due to double trigger acceleration. The remaining 2,500 options will be forfeited.
We calculate the Fair Market Value of Option Grants for ASC718 reports using standard Black-Scholes calculations.
FMV = S * N(d1) - X * e^(-rt) * N(d2)
The expected term of an option grant is calculated using the simplified formula:
Expected Term = (Vesting Term + Contractual Term)/2
This is calculated on a monthly basis, where vesting term is defined by the number of months that have vested so far (in the event of a cliff, the vesting term is the number of months until the cliff triggers.)
For example, take an option grant that vests 25% annually for 4 years, and expires in 10 years.
|Vesting Schedule||Contractual Term||Average|
That indicates an expected term of 75 months, or 6.25 years.
Capyx calculates the volatility of a private company by requesting at least 3 comparable publicly traded companies. We then calculate the historical price volatility of each of those companies using the grant date and expected term of the option grant as a starting point.
The volatility is calculated by taking the standard deviation of the natural log returns over the time period in question. Capyx then computes the blended average of those volatilities, and uses that as the volatility for the option grant. All data is pulled from Quandl .
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