How Startup Equity Works
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1) The document outlines the initial structure and a seed round of financing for a startup company. It shows the founders owning 90% equity initially and employee options making up the remaining 10%. 2) After the first seed round, an angel investor (Angel A) invested $100k for 20% equity. This set the pre-money valuation at $400k and post-money valuation at $500k. 3) A second seed round occurred, with Angel A investing another $100k for 6% equity and a new angel investor (Angel B) investing $300k for 18.75% equity. This increased the post-money valuation to $1.6m.
How Startup Equity Works
- 1. Initial StructureLiabilities+EquityAssetIP900,000Founders Shares Equity:Founder = 90%Employee Options = 10%Founding Sweat EquityAdvisorsOptions Pool: 100,00 Shares
- 2. Seed Round 1 Liabilities+EquityAssets900,000 Founders SharesIP(400K)Pre-Money400KPre-Money Shares 1mPost-Money500KPost-Money Shares 1.25m100,000 Option Pool SharesAngel A Investment (100K)250,000 Angel A Shares Based on an investment of 100k for 20% equity the Post-Money Valuation is set at $500,000
- 3. Therefore the Pre-Money = Post-Money-Investment 500k-100k=400K Pre-moneyThe Price Per Share = Pre-money / # of Pre-money Shares
- 5. The New Shares Issued = Investment/Share Price $100,000/$.40=250,000 Total Shares Post-Money = 1,250,000Equity = Pre-money Shares/Post-money SharesFounder: (900,000/1,250,000) = 72% Employee Options: (100,000/1,250,000) = 10% Angel A: (250,000/1,250,000) = 20%
- 6. Seed Round 2 Liabilities+EquityAssets900,000 FSIP(1.1m)Pre-Money1.2mPre-Money Shares 1.25m100,000 OPSPost-Money1.6mPost-Money Shares 1.66mAngel A Investment (100K)250,000 Angel A Shares Angel A 2nd Investment (100K)104,167 Angel A Shares Angel B Investment (300K)312,500 Angel B Shares Based on Angel B investments of 300k for 18.75% and a re-up from Angel A of 100k for an additional 6% the Post-Money is set at 1.6m (This number is determined by 5x the annual revenues)
- 7. Therefore the Pre-Money = Post-Money-Investment $1,600,000 - $400,000 = $1,200,000 Pre-moneyThe Price Per Share = Pre-money / # of Pre-money Shares
- 9. The New Shares Issued to Angel B=Investment/Share Price $300,00/$.96=312,500The New Shares Issued to Angel A= Investment/Share Price $100,000/$.96=104,167Equity = Pre-money Shares/Post-money SharesFounder: (900,000/1,666,667) = 54% Employee Options: (100,000/1,666,667) = 6% Angel A: (250,000+104,167)/1,666,667) = 21.25% *Add Round 1 + Round 2 sharesAngel B: (312,500/1,666,667) = 18.75%*Equity is diluted due to addition of new shares, however the value of the company increased = investment amount increases in value