Deciphering fund raise history (confusion on terms)
Hello all,
I am trying to understand the terms for a project (but being new and dipped in folly am unable to get it)
Fundraise history for an early stage start up as follows:
May 2013: $1mn seed round at $3mn pre money Jan 2015: $700k round as convertible note at $10mn pre money cap and 20 percent discount
Jan 2019: Start up now looking to raise $3mn at $15mn pre money valuation.
My doubts: To analyze this, does the Jan 2019 15mn pre money valuation include also the convertible debt? How does it work? What will be the final cap table? I don't understand how to calculate this without knowing the amount of shares outstanding...
No details on the interest etc. but anyways...
The conv note will convert into equity, but there are nuances.
The Jan 2015 cap is $10m. But the Jan 2019 premoney valuation - the discount: $15m * (1-20%) = $12m.
So you ignore the discount since $12m > $10m.
Thus the equity share of the conv. note at conversion is $700k/$10m = 7%.
But this conversion comes at the Jan 2019 round.
So how does the final cap table work out:
May 2013. $1m at $3m pre = $4m post. Seed investor(s) has 25%, Founders have 75%.
Jan 2015 round. No change in cap table as the conv. note hasn't converted.
Jan 2019 round. Let's call this Series A. $3m at $15m pre = $18m post. Series A investors will have 16.7%. But we add the convertible note dilution. So the total dilution is 16.7% + 7% = 23.7%.
So on a fully diluted basis:
Founders: 75% * (1-23.7%) = 57.2%. Seed investors: 25% * (1-23.7%) = 19.1%. Conv note investors: 7%. Series A investors: 16.7%.
Sum: 100%
You are amazing. Thank you
Thanks for the clear breakdown. Just for curiosity's sake, would any of the calculations change if you included interest but assumed no amort?
Edit: Sorry, just saw you answered this below.
What would have happened if there was a 5 percent interest rate? Would it been have added to the amount of funding that the convertible note lenders provided? And then we would have divided the sum of interest and principle by the valuation cap?
The interest doesn't add to the amount of funding. That stays at 700k. It does add to amount of equity that the convertible note holders will receive. Which is (principal + interest accrued) / $10m in this case
Wow great explanations. Would you be able to explain how these would change if the Series A had a full ratchet provision?
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