STOCK PRO RATA SERIES

They might not share the market’s view of your valuation or might not have the cash available at the time. That’s not to say that your investor will always take up their pro rata. Familiarize yourself with all of these parts concerning your termsheet, and you can become a real asset to your company.

STOCK PRO RATA SERIES

(A 1x Non-Par what? This article is the third in a series - that term is explained in Part 2, and while you’re at it - you might as well read Part 1.). For simplicity, in all our sale calculations we assumed that the investor has a 1x Non-Participating Liquidation Preference - so it would have converted. In this scenario, the dilution from 20% to 16% leaves your investor crying himself to sleep at night on a pile of just $32 million after the $200 million exit, for a profit of a mere $27 million. If he doesn’t invest in the second round, although his number of shares remains the same, his ownership percentage falls (he is “ diluted”) and therefore so does his share of the exit proceeds. 20% of the total round), so that he can keep himself at 20% of your company.įast forward to a $200 million exit: your investor would take home $40 million - a profit of $32 million on his $8 million total invested. That might be described as a pre-emption right on issuance, or fall under a heading like “Follow-on,” “Further issues”, or simply “Pro Rata.” In our scenario, you would have to give your investor the opportunity to put in another $3 million (i.e. Your termsheet will likely say that when you issue further shares you have to offer your investor his pro rata amount, before you can offer them to anyone else. As part of his overall portfolio strategy, your investor probably wants to get as much money into it as possible. The company, and therefore the investor’s stake in it, is worth far more than when he invested and looks to be on the path to a big exit.

The company does well, and later you look to raise $15 million on a pre-money valuation of $60 million.

Let’s consider the positive scenario first. One key part of that strategy will be the percentage of the company that they own by the time of a Liquidity Event or “exit.” Backing The Winners An investor will have a strategy to generate a return on that portfolio of results. Investors have a limited number of investments that they can make some will be winners, some will break more or less even, and some will fail. Clearly, this has the most significance for you as the founder, and the company that you’ve created, but it’s not insignificant for the investor. We’ve been using the example of $5 million invested at a $20 million pre-money valuation, which leaves your investor holding 20% of your share capital. “ Down round” - an investment round conducted at a lower valuation than previous The Portfolio View “ Pro rata” (noun) - almost always refers to a shareholder’s proportion of a new share issuance Usually, refers to dividing something up among shareholders in the same proportions as their shareholdings in the company “ Pro rata” (adjective) - “in proportion to”. The next few articles in the series will deal with those protections, beginning in this article with protections around issuing new shares. The vast majority of a termsheet isn’t about the economics - it’s about the way the company will operate while it has the investor’s cash in and the tools your investor can use to protect the stake that they have taken in the company. If you have a handle on those two areas then you can understand the value of an investor’s cash on its way in, and what it will be worth on its way out - clearly that’s key. So far in the series, we’ve looked at the economic terms of the investment - first the valuation, and then the liquidation preference and waterfall.

The aim of this piece is to demystify the termsheet: to explain the jargon to watch out for and give you practical examples and resources to understand what each term might mean for your business.

Stock pro rata