The next round is a $3mm round at $9mm pre, $12mm post. “You invest $50k in a seed round at a $5mm cap and own 1% of the company.
Literally translated, pro rata means “according to the rate”, but the way to think about it is basically the right to maintain a proportional ownership percentage of the company. Generally seed and series A investors have ownership targets to maintain, so let’s say we now do a series B, and in order to maintain their ownership percentage, the Series A investor executes their pro rata rights. The series A investors are taking up 28% of the round, and when modeled out on a post basis, that A investor ends up with 21.8% of the company. Now similarly, let’s do a series A where the same company raises $7M on a $25M pre-money valuation. You can see that while the seed investor took 20% of the round, their ownership on a post money basis is actually 16% if you consider the total number of shares between the founders and the employee option pool. Now let’s assume you go out and raise $1M on a $5M pre-money valuation. You also will set a par value for your shares, which can be as low as you want, generally $.0001 or some variation is used so you can purchase your stock for next to nothing (because it’s currently worth nothing) and file your 83(b) election.
You can incorporate with any number you want, but nice round numbers generally make the math easier. Most companies will generally incorporate a C corporation with 10M shares, but you don’t have to do that. What you see is a pretty standard incorporation table. If you have questions or need help, feel free to comment, or email me or tweet me let’s start by incorporating a company.
You can access my cap table calculator here to download and use with this article, and use for your own purposes. When it comes to modeling dilution and pro rata rights, you can use a simple calculation to build out your current and future financing scenarios and see how it plays out in the long run. When you raise $1M on a $5M valuation, that’s selling 20% of the company, right? But what happens when you then raise $7M on a $25M valuation? You’ve sold 28%, you’re already out 48% of your company! Actually no, that’s not the case, and I’ll explain below.