how equity management is changing" by henry ward, ceo at eshares
TRANSCRIPT
HOW EQUITY MANAGEMENT IS CHANGING BY HENRY WARD CEO AT ESHARES
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HOW EQUITY MANAGEMENT IS CHANGING
HENRY WARDCEO AT ESHARES
@ESHARES
A Simple Financing
Cap Table
Bob 50% ?
Mary 50% ?
Option Pool 0%
New Investors
Dave ? $1,000,000
Financing Terms
Pre Money Valuation $4,000,000
Post Money Option Pool 0%
What will this be?
New Cap Table
Bob 40% $2,000,000
Mary 40% $2,000,000
Option Pool 0% $0
Dave 20% $1,000,000
100% $5,000,000
Of course!
Two Types of Financings
Equity FinancingConvertible Note“Priced Round”“Debt Round”
Equity Financing Terms
Pre Money ValuationValue of the company prior to the investment of “new money”
Post Money ValuationValue of the company after the investment is made
Option PoolNumber of shares reserved for employee stock options
Add an Option Pool...
Cap Table
Bob 50% ?
Mary 50% ?
Option Pool 0%
New Investors
Dave ? $1,000,000
Financing Terms
Pre Money Valuation $4,000,000
Post Money Option Pool 20%
What will this be? Makes sense!
New Cap Table
Bob 30% $1,500,000
Mary 30% $1,500,000
Option Pool 20% $1,000,000
Dave 20% $1,000,000
100% $5,000,000
Have an Option Pool?
Cap Table
Bob 40% ?
Mary 40% ?
Option Pool 20%
New Investors
Dave ? $1,000,000
Financing Terms
Pre Money Valuation $4,000,000
Post Money Option Pool ?What will this be?
Got it. Everything gets
diluted.
New Cap Table
Bob 32% $1,600,000
Mary 32% $1,600,000
Option Pool 16% $800,000
Dave 20% $1,000,000
100% $5,000,000
More Options Please
Cap Table
Bob 40% ?
Mary 40% ?
Option Pool 20%
New Investors
Dave ? $1,000,000
Financing Terms
Pre Money Valuation $4,000,000
Post Money Option Pool 20%
What will this be?
Sure. Post Money is Fixed.
New Cap Table
Bob 30% $1,500,000
Mary 30% $1,500,000
Option Pool 20% $1,000,000
Dave 20% $1,000,000
100% $5,000,000
More Investors Please
Cap Table
Bob 40% ?
Mary 40% ?
Option Pool 20%
New Investors
Dave ? $1,000,000
Ann ? $1,000,000
Financing Terms
Pre Money Valuation $4,000,000
Post Money Option Pool ?
What will this be?
Rounding errors aside, OK.
New Cap Table
Bob 27% $1,600,000
Mary 27% $1,600,000
Option Pool 13% $800,000
Dave 17% $1,000,000
Ann 17% $1,000,000
100% $6,000,000
Make It Hard Now...
Cap Table
Bob 40% ?
Mary 40% ?
Option Pool 20%
New Investors
Dave 20% ?
Ann ? $500,000
Jeff 5% (max to $400K)
Financing Terms
Pre Money Valuation $4,000,000
Post Money Option Pool 15%
And what if I negotiate the Pre Money Valuation?
What will these be?
Let’s Go Back Here
Cap Table
Bob 50% ?
Mary 50% ?
Option Pool 0%
New Investors
Dave ? $1,000,000
Financing Terms
Pre Money Valuation $4,000,000
Post Money Option Pool 0%
What will this be?
New Cap Table
Bob 40% $2,000,000
Mary 40% $2,000,000
Option Pool 0% $0
Dave 20% $1,000,000
100% $5,000,000
Let’s Sell the Company
Cap Table
Bob 40% -
Mary 40% -
Option Pool 0% -
Dave 20% $1,000,000
100% -
Sales Price = $10M!!!
Payout
Bob 40% $4,000,000
Mary 40% $4,000,000
Option Pool 0% $0
Dave 20% $2,000,000
100% $10,000,000
Easy!
Let’s Sell the Company
Cap Table
Bob 40% -
Mary 40% -
Option Pool 0% -
Dave 20% $1,000,000
100% -
Sales Price = $500K :(
Payout
Bob 40% $0
Mary 40% $0
Option Pool 0% $0
Dave 20% $500,000
100% $500,000
Liquidation Preference!
A Fundamental Law
Assets = Liabilities + Equity
Company Assets - Total Liabilities = Shareholder Equity
(think of it this way....)
$100 $80 $20
A Fundamental Rule
In case of liquidation, Debts (i.e. Liabilities) are always payed before Shareholder Equity
Capital Structure
Assets
Liabilities
Equity
$100
$20
$80
Capital Structure
Assets
Liabilities
Equity
$80
$0 (shareholders lose everything)
$80
Capital Structure
Assets Liabilities$60 $60 (debt holders lose $20)
Payout Graph
$ Sales Price
$ Payout
Debt
Equity
$80
$80
Let’s Sell the Company
Sales Price = $10M
Payout
Bob 40% $4,000,000
Mary 40% $4,000,000
Option Pool 0% $0
Dave 20% $2,000,000
100% $10,000,000
Sales Price = $500K
Payout
Bob 40% $0
Mary 40% $0
Option Pool 0% $0
Dave 20% $500,000
100% $500,000
Preferred Shares behave like Debt!Preferred Shares behave like Equity!
Capital Payout Graph
$ Sales Price
$ Payout
$4M
$5M$1M
$1M
Preferred (Dave)
Common (Bob & Mary)
“Dead Zone” Protection
Accruing DividendsDividends (i.e. 6%) that accrue
Participating (vs Non-Participating)Participating Preferred takes pro-rata portion of any gain after receiving cost basis
Investment MultipliersIncreases the protected return to the investor e.g. 2x returns twice the original investment before common is paid
Accruing Dividends
$ Sales Price
$ Payout
$4M
$5M$1M
$1M
Preferred (Dave)
Common (Bob & Mary)
$1M + 6% * t
Grows over time
Participating Preferred
$ Sales Price
$ Payout
$4M
$5M$1M
$1M
Preferred (Dave)
Common (Bob & Mary)
Preferred Multiplier
$ Sales Price
$ Payout
$4M
$5M$1M
$1M
Preferred (Dave)
Common (Bob & Mary)
$2M
A Few More Terms
Anti DilutionProtects investor ownership percentage in the case of a down round.
WarrantsJust like Options (right to buy at a strike price) except they are add to the fully diluted (instead of from option pool)
Partially Participating Liquidation PreferenceBehaves like Participating Preferred up to a certain threshold which is usually expressed as a multiplier of the investment
What is eShares?
We are an SEC registered Transfer AgentThe first one focused on private companies.
We issue electronic shares, options, debt, and derivativesAnd track ownership, restrictions, and shareholder information.
We automate their approval and compliance
Seller Buyer
Including new issues, transfers, and settlement.
And track the shareholder registryAnd the shareholders portfolios.
Cap Tables
Portfolios
Consolidating equity services for privately owned assets
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For companies and shareholders
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