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In the dilution examples above, we determined ownership percentage and the number of shares to be sold to the investors without ever calculating the price per share. We did that by first calculating the percentage being bought by the investors using the pre-money valuation and the investment amount:

To calculate the number of shares, we had to decide which total share number we were going to use (issued and outstanding or fully diluted); and because we wanted as many shares as possible, we chose fully diluted. The formula for getting to the number of shares is:

If you are calculating the number of shares based on issued and outstanding shares only, you would substitute the issued and outstanding shares total for the fully diluted share total in the formula above.

Expressing the post investment ownership percentage in the term sheet is a valid way to ensure that there are no surprises. For example, the term sheet might say:

โ€‹โš–๏ธlegaleseโ€‹Immediately following the new investment, the purchasers of the Preferred Stock will own X% of the Company, calculated on a fully-diluted basis, including all issued and outstanding shares of stock on an as-converted to common stock basis, all convertible securities outstanding, and an available option pool of [10]%.

If you are going to make an offer to invest in a company through a term sheet, and you donโ€™t know how many securities it has outstanding, and you want to assure yourself of your desired percentage after your money comes in, you will probably express the price per share on a post-money basis.

The basic share price calculation is:

As we explain in Calculating Ownership and Dilution, there are two running share totals and it is possible to use either one in the calculation. The price per share in a fixed price round may be calculated by dividing the pre-money valuation by either the number of shares outstandingโ€”the issued and outstanding sharesโ€”or the issued and outstanding shares on a fully diluted basis.

Price Per Share in Scenario A

โ€‹exampleโ€‹Letโ€™s look at the difference in the two approaches using our cap table from our scenario A example just above, where the Round 1 investors are buying 20% of the company for $250K at a $1M pre-money.

Figure 3S: Cap Table Prior to Investment

Shares or OptionsIssued and OutstandingFully Diluted
Founders10,000,00096.67%86.96%
Employees345,0003.33%3.00%
Issued and Outstanding10,345,000100.00%
Option Pool1,155,00010.04%
Total Fully Diluted11,500,000100.00%
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