You’re reading an excerpt of Angel Investing: Start to Finish, a book by Joe Wallin and Pete Baltaxe. It is the most comprehensive practical and legal guide available, written to help investors and entrepreneurs avoid making expensive mistakes. Purchase the book to support the authors and the ad-free Holloway reading experience. You get instant digital access, commentary and future updates, and a high-quality PDF download.

Now the option pool has to get topped up such that it will be 15% of the fully diluted shares after the dilutive effect of the preferred stock sale. Because the preferred stock sale will cause a 20% dilution (selling 20% of the company) across the board, the option pool must be 18.75% prior to being diluted by the preferred stock:

Figure 5: Cap Table Accounting for the Increase in the Option Pool

Shares or OptionsIssued and OutstandingFully Diluted
Founders10,000,00084.79%68.90%
Employees345,0002.93%2.38%
Convertible Note Investors1,448,29912.28%9.98%
Issued and Outstanding11,793,299100.00%
Option Pool Available2,721,53118.75%
Total Fully Diluted14,514,830100.00%

The stock option pool must be increased from 1,155,000 to 2,721,531 in order for each to reach 18.75% of the total fully diluted shares. From Figure 5 above, it is clear that all equity and option owners have shared the burden of the increase in the stock option pool when calculated on a fully diluted basis.

Sale of Preferred Stock

The terms of the stock sale stipulated that the preferred stock investors would own 20% of the company on a fully diluted basis, and that at that time the option pool would represent 15% of the company on a fully diluted basis. Those conditions result in the cap table represented in Figure 7 below.

Figure 6: Cap Table After the Preferred Stock Sales

Shares or OptionsIssued and OutstandingFully Diluted
Founders10,000,00064.84%55.21%
Employees345,0002.24%1.90%
Convertible Note Investors1,448,2999.39%7.98%
Preferred Stock Investors3,628,70823.5320.00%
Issued and Outstanding15,422,007100.00%
Option Pool Available2,721,53115.00%
Total Fully Diluted18,143,538100.00%
You’re reading a preview of an online book. Buy it now for lifetime access to expert knowledge, including future updates.
If you found this post worthwhile, please share!