Ask the Capital Calculator: What will my share in the proceeds be if my company is sold following its equity financing?

In addition to calculating dilution, which was discussed in my last post, the Capital Calculator also addresses the following question:

If my company was sold, how much will my co-founders, the other existing equity holders and I receive in connection with the transaction?

The principal factors that impact how proceeds in a sale transaction are allocated among the equity holders are the following:

  • The pre-money valuation of the Company and the amounts raised in the Company’s equity rounds. This dictates the percentage of the Company owned by the investors.
  • The size of the option pool.
  • Whether the liquidation preference of the preferred stock is equal to one times (1x) the price per share of the preferred stock or something different.
  • Whether there are accruing dividends that get paid to the holders of preferred stock in a sale transaction.
  • Whether the preferred stock is “non-participating,” entitling the investors to the greater of their liquidation preference or what they would get had they converted to common stock, or whether the preferred stock is “participating,” entitling the investors to their liquidation preference plus what they would get had they converted to common stock after the payment of such liquidation preference.

Relying on customary assumptions, the Capital Calculator allows you to quickly analyze the approximate impact of changes to these and other variables on expected returns in connection with the a sale of the Company at an exit value specified by the user. We hope founders will find this tool useful in understanding how these terms impact them – enabling founders to be more informed in negotiating their term sheets with investors.

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