How Startup Financing Works
There are two basic levers to determine ownership after the investment.
Stock Option Pool
Stock options are created from the
, shares set aside by the company to attract and retain key employees. It can be created from either the
side of the Financing Round
Convertible Debt is a popular way to do early financing. It allows the company to raise money while deferring the Valuation of the company until the next Financing Round.
To reward the Angel Investors
for risking their money early at an unknown Valuation
, they normally ask for a
to the next round's Share Price
, and/or a Pre-Money
converts into the same type of stock as the next round of financing, with the same terms.
determines how much of the investment is returned to the investor before others receive any money, based on the round's Stock Type
The shares are either converted into Common, or the investors take the amount they invested times the Liquidation Preference, whichever returns more money.
The shares are converted into Common, as well as the investors take the amount they invested times the Liquidation Preference.
This is known as a Double Dip
, and the effects are pronounced at lower exits. To reduce that impact, a
can be applied, which removes the Liquidation Preference
once that investor's returns reach the cap.