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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 can see that our 18.75% option pool in Figure 5 has been diluted by the new investment as well, and is now at the target 15%.

So what is the price per share that the preferred stock investors paid? They spent $2M for 3,628,708 shares, or $0.55116 per share.

Checking the Convertible Note Conversion

We started working through the impact of the preferred stock investment on the cap table by assuming that the note holders would be better off with the valuation cap conversion than the discount conversion, but let’s check.

If the noteholders had converted their $420K at the 20% discount, they would be paying $0.55116 multiplied by $0.80 per share, or $0.44093 per share. And $420K divided by $0.44093 is 952,532 shares.

Converting at the valuation cap generated 1,448,299 shares, so that was clearly the more advantageous conversion option.

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