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Post by mrclondon on Feb 19, 2015 20:20:16 GMT
As a newcomer to unquoted equities where the risk and consequences of dilution is far greater than with mainstream equities I thought I would have an attempt to come up with a worked example. This is purely me thinking aloud, and whilst I have sense checked it with someone who has a lot more experience than me, there could well be flaws in my logic so I would welcome comments. <snip - deleted and replaced by a new post below following the very helpful comments from bigfoot12 >
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bigfoot12
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Post by bigfoot12 on Feb 19, 2015 21:22:09 GMT
As a newcomer to unquoted equities where the risk and consequences of dilution is far greater than with mainstream equities I thought I would have an attempt to come up with a worked example. This is purely me thinking aloud, and whilst I have sense checked it with someone who has a lot more experience than me, there could well be flaws in my logic so I would welcome comments. Lets say company Z undertakes a Series A equity fund raise of £2.5m. The valuation placed on the company is £50m, so the new shareholders have a stake of 5% of the company (2.5 / 50).
Two years later, the company undertakes a Series B fund raise of £20m.
Scenario 1
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The company is now valued at £100m (double the Series A valuation) The new series B shareholders own £20m and the existing shareholders £80m.
So the Series A shareholders now own 5% of £80m = £4m of shares, which are now worth 1.6 times what was paid for them (£4m / £2.5m )
Good news.
Scenario 2
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The company is now valued at £60m (20% up on the Series A valuation) The new series B shareholders own £20m and the existing shareholders £40m.
So the Series A shareholders now own 5% of £40m = £2m of shares, which are now worth 0.8 times what was paid for them (£2m / £2.5m )
Not so great news.
Normally you discuss the pre money valuation, and you need to include the impact of the money being invested. So after the round A the new investors would own £2.5m/£52.5m or 4.76% of the equity (as the company is now worth £2.5m more than it was as it has their cash). So in Scenario 2 the pre money value is £60m, but post the investment the value is £80m (because the company has £20m more in its bank account). The round A investors now have 4.76 * 60 / 80 or 3.57%, but of a company worth £80m or £2.86m. So not a disaster. This is why pre-emption rights are important. You are able to buy shares in all future rounds such that your % won't fall. If you think that the price on the next round is too low you can buy more shares. Your dream is that they become too expensive for you to afford.
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Post by mrclondon on Feb 19, 2015 21:36:16 GMT
OK, 2nd attempt at the worked example.
Lets say company Z undertakes a Series A equity fund raise of £2.5m. The valuation placed on the company is £50m, so the new shareholders have a stake of 4.76% of the company (2.5 / 52.5).
Two years later, the company undertakes a Series B fund raise of £20m.
Scenario 1
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The company is now valued at £100m (double the Series A valuation) before the new cash. The new series B shareholders own £20m and the existing shareholders £100m.
So the Series A shareholders now own 4.76% of £100m = £4.76m of shares, which are now worth 1.9 times what was paid for them (£4.76m / £2.5m )
Good news.
Scenario 2
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The company is now valued at £60m (20% up on the Series A valuation) before the new cash. The new series B shareholders own £20m and the existing shareholders £60m.
So the Series A shareholders now own 4.76% of £60m = £2.86m of shares, which are now worth 1.1 times what was paid for them (£2.86m / £2.5m )
Acceptable news, certainly not the disaster my first attempt at working this through painted !
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Post by Goncalo | SyndicateRoom on Apr 6, 2015 8:43:08 GMT
Don't forget that if you invest with pre-emption rights (as you always should in my personal opinion), you could follow your money and keep your % ownership. Or if the company does a 'down-round' at a later stage (i.e. the valuation goes down instead of up), you can keep your % ownership by investing potentially considerably less than you initially invested and you protect your position in the company. That is why business angels always demand pre-emption rights: 1) if the company is a star investment, they follow their money to avoid being diluted when the company is winning; 2) if the company is not performing and has a down-round they can decide whether the new lower valuation makes it up for it. An example of the 2nd situation is a company that has great technology but that didn't perform as expected and now is getting a new cash injection and the senior management team is being replaced. This situation might represent a great investment opportunity but unless you invested with pre-emption rights, you may not have a chance to protect your % ownership when the price is much better for you as an investor (i.e. lower).
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