http://www.startupcompanylawyer.com/2008/11/17/what-does-a-liquidation-preference-spreadsheet-look-like/

Adam

Prior to the IPO, founders or key management may be issued more shares if they have been overly-diluted over time. The investors want to keep the founders/management highly motivated.

But this is more likely in a down round or a recap. This is not likely if the valuation is monotonically increasing.

We picked 2M shares because we wanted the share price to be approximately $1. The exact number of shares is not relevant as long as they are sufficiently granular, e.g. each share isn’t worth $10,000. You need to be able to give out shares without giving away $10,000 at a time.

There may be some other legal niceties associated with the number of shares—ask your lawyer.

As you are aware, your formula basically means

= [(premoney valuation) - (value of option pool top up shares) - (value of bridge loan)] / (premoney common and options)

I don’t think that this is particularly intuitive or the way most people would conceptualize how you get to price per share.

I typically set up spreadsheets on the price per share to be:

= (premoney valuation) / (fully diluted premoney shares including option pool top up and bridge conversion shares)

I would suggest revising cell D2 as

=B3/(C17+C19+C15)

which written out would mean

= (premoney valuation) / [(premoney common and options) + (option pool top up) + (shares issued upon bridge conversion)]

You then need to turn on iterations in tools, options, calculations — since the option pool number and the bridge conversion shares number needs to iterate to get into the fully-diluted share number to get into the price per share calculation. I assume that you wrote the formula the way you did to avoid the circular reference.

There are, of course, lots of additional bells and whistles that one could add (taking into account how the liquidation preferences work (participating/non-participating/cap) and whether options get exercised if they are in the money or not), but probably too complicated for the average user.

We build custom spreadsheets to plan for M&A outcomes where you can enter the sale price, and we calculate on a shareholder by shareholder (and optionholder) basis (or at least a class/series of stock basis) exactly how much (net) money they get. We add if/then formulas to determine automatically whether it is economically beneficial for an optionholder to exercise their option. In other words, if you put in a low liquidation price, then the price per share to common might end up being below the option exercise price (and the spreadsheet is smart enough to figure it out). For example, for a non-participating preferred, there is a finite pool of money left to go to the common, and whether options are exercised or not will affect the price per share to common (which is a circular formula).

We also build spreadsheets to model the effect of a “down” round financing and how the anti-dilution adjustment results in more pre-money shares, which drives the price per share down (which is a circular formula).

This is why I expect potential paralegals that I hire to have strong math skills.

I liked the video.

I mean, are there other events at which more shares are allotted to the founders ?

And how and when should this number of 2,000,000 be decided ?

Is it decided keeping in mind what the target share value should be ?