Editor’s Note: This post was originally published on Seattle 2.0, and imported to GeekWire as part of our acquisition of Seattle 2.0 and its archival content. For more background, see this post.
By Gerry Langeler
- You have raised venture capital from a couple of firms, perhaps over a round or two. Your company has hit a few bumps in the road and now you have some investors willing to write the next check, with others not or not so sure.
- You have raised venture capital from a couple of firms. You are doing a follow-on round, with a new outside lead investor to price it, but one of your existing investors has run out of cash, or their fund has gotten so old they can’t / won’t invest.
- You have raised venture capital and hit a few bumps along the way. Your investors are still hanging in there for the next round, but a couple of early employees / founders have departed. They own a material amount of the Common stock, but are no longer adding any value. This is inhibiting your ability to offer meaningful shares to new people ready to do the heavy lifting.
- Pre-money value: The value of your company BEFORE new cash is invested. For example, if you have two million shares of stock outstanding, and I am ready to offer to invest in you at $1 per share, you have a $2 million pre-money value. (2 million shares times $1 per share)
- Post-money value: The value of your company AFTER the new cash has been invested. In the example above, if I now invest $1 million at $1/share, that buys 1 million new shares. You now have three million shares outstanding, at a value of $1/share, for a post money value of $3 million. Simply put: post-money = pre-money plus new cash.
- The pre-money value was set to market, which was (sadly) below the last round post-money due to the problems in execution the firm had experienced. In this case we calculated the new pre-money by looking at what the new implied post-money would be (again: pre-money plus new cash going in), then imagining the company made its plan for the next 16 months, and then guessing what the pre-money value of the next round would likely be off of the company’s 2011 performance. The post-money from this round could not exceed the pre-money for the next round, unless we were going to be foolish enough to set ourselves up for yet another down round. We were not. This was a carrot to the investor syndicate.
- The previous round was offered to be pulled though into the new lower-priced Series B for those who participated in the new round, but only 33 cents on the dollar. This incented the original investors to play, without crushing the existing employees. Another investor carrot, albeit a partial one.
- For those not participating, their original Preferred was converted to Common, and reverse split 10:1. That’s a wipe out. In the end, the Series A would cease to exist. As opposed to the carrot, this was the stick – a BIG stick.
- We did the math and for a few key employees we needed to refresh their Common options somewhat, and so we had to build up the option pool. We didn’t bring them all the way back to where they were (everyone in this scenario shares some pain) – but we did to appropriate levels for their roles, after a typical Series B.
- The departed founder was diluted by all this, of course, although they still held a share of the company that could be of material value if the new team finally delivered on the original vision.
This is one of those classic cases where the “right answer” is for everyone to end up equally uncomfortable, but for the company to get the cash it needs to continue on. If the firm can now “pull through” on its operating challenges, the pull through financing will have helped make that happen.