Question

EXHIBIT 5 Sample Cap Table Stage Pre-Money / Post-Money Valuation Pre-money Investment Post-money Distribution of Equity Ownership Team VC1 VC2 Angel Seed $1M $250K (angel) $1.25M 80% 20% Series A $4M $1M (VC1) $5.00M 64% 16% 20% Series B $16M $4M (VC2) $20.00M 51% 13% 16% 20%

Refer to the sample cap table in Exhibit 5 of the Financing Entrepreneurial Ventures reading. If the seed round had taken place at a $2 million post-money valuation—but every other round happened according to the terms described in Exhibit 5—who would be better off and who would be worse off (in terms of their ownership percentages of the company)?

• Only the founders would be better off.
• Everyone except the founders would be worse off.
• Everyone except the seed round investors would be better off.
• Everyone would be better off.

Answer 1

Seed Round post money valuation = $ 2 million

Amount funded by the Angel Investors = $250,000

So, Value of Team (pre-money) = $2 million - $250,000 = $1,750,000

So, Equity of Team = 1750000/2000000 = 87.5%

Equity of Angel investor = 12.5%

Similarly.

Series A Funding post money valuation =$5 million

$1 million investment by VC1

Out of $4 Million pre-money valuation ,Share of Angel =12.5% or $500,000 , share of team 87.5% or $3,500,000

So, after Series A round,

Equity of Team =$3,500,000/$5,000,000 = 70%

Equity of Angel = $500,000/$5,000,000 = 10%

Equity of VC1= $1 million/$5 million = 20%

Series B Funding post money valuation =$20 million

$4 million investment by VC2

Out of $16 Million pre-money valuation ,Share of Angel =10% or $1.6 million , share of team 70% or $11.2 million, Share of VC1 = 20% or $3.2 million

So, after Series B round,

Equity of Team =$11.2 million /$20 million = 56%

Equity of Angel = $1.6 million/$20 million = 8%

Equity of VC1= $3.2 million/$20 million = 16%

Equity of VC2 = $4 million/$20 million = 20%

On comparison with the original situation presented in the table, it can be said that Only the Founders (Team) were better off, VC1 and VC2 had the same situation but the Angel was worse off.

From the available options, the 1st option : Only the founders would be better off is correct