#Stock pro rata plus#

The regular vanilla Convertible Preferred and the Participating Preferred. Let us examine this in greater detail now. There are a number of important rights and privileges that investors secure via a preferred stock purchase, including a right to a board seat, information rights, a right to participate in future rounds to protect their ownership percentage (called a pro-rata right), a right to purchase any common stock that might come onto the market (called a right of first refusal), a right to participate alongside any common stock that might get sold (called a co-sale right), and an adjustment in the purchase price to reflect sales of stock at lower prices (called an anti-dilution right). Compared to common stock, it is a superior security. Preferred stock comes with certain rights, preferences, privileges and covenants. You already have common stock but these are not the securities being exchanged.

Your ownership rights go down by 5% which, for all intents and purposes, is significant.ģ. When a round of financing is done, security is exchanged in lieu of cash received. In other words, they will own 25% of the company rather than 20%. If the investor says that they will value company $1M post-money, what they are saying is that they are actually giving you a pre-money valuation of $750K. Why? The total valuation is $1.25M which is $1M pre-money + $250K capital. Thus in a pre-money valuation, the Investor owns 20%. If the $1 million valuation takes into consideration the $250,000 investment, it is referred to as post-money.

If the $1 million valuation is pre-money, the company is valued at $1 million before the investment and after investment will be valued at $1.25 million. The ownership percentages will depend on whether this is a $1 million pre-money or post-money valuation. Both parties agree that the company is worth $1 million and the investor will put in $250,000. Suppose that an investor is looking to invest in a start up. Let’s explain the difference by using an example.

#Stock pro rata plus#

Post-Money thus includes the pre-money plus the incremental injection of capital. In other words, Pre-money valuation refers to the value of a company not including external funding or the latest round of funding. The Pre-Money Valuation + Investment = Post-Money Valuation. You will hear the concept of pre-money valuation vs. You can quiz your attorney on these because some of these are important enough to impact your operating degree of freedom in the company.The starting point of a term sheet is valuation of the company. But it is just as important for you to know some of the key elements that govern an investment agreement. A little “and” or “or” can put you back significantly. And more importantly, an attorney that has experience in the field and has reviewed a lot of such documents. Make sure that you have an attorney representing you. The key investment terms are laid out in the sheet and would be used in much greater detail when the stock purchase agreement, the investor rights agreement, the voting agreement and other documents are crafted.Ģ. All the term sheet does is that it requires you to keep silent on the negotiations, and may even prevent you to shop the deal to anyone else. Signing a term sheet does not mean that the VC will invest in your company. First, term sheet does not trigger the wire. So let us go over some of the details that you need to watch out for.ġ.

So the hard work is all done! You can rest on your laurels, sign the term sheet that the VC has pushed across the table, and execute the sheet, trigger the stock purchase, voter and investor rights agreements, get the wire and you are up and running! Wait … sounds too good to be true, doesn’t it? And yes you are right! If only things were that easy. You have evangelized your product across various circles and the good news is that a VC has stepped forward to invest in your company. Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.