1. Module 3-2-1 Capitalization - Concepts
Innovation & Commercialization
Module 3-2-1
Capitalization - Concepts

2. Capitalization Analysis

3. How Much Do I Get?
Investor asks, “How much do I get for my investment …?
Investor offers $50,000 and Entrepreneur agrees to give 50% of the company
Investor decides to invest $100,000 instead
Does the investor get 100% of the company?

4. Pre-Money/Post-Money Valuation
Company Valuation
Post-Money
Actual cash put in by investors
Pre-Money
Intrinsic value of the company before investment
Relates to previous investment, but does not equate to dollars spent so far!

5. Capitalization Analysis
Ownership percentages and dollar value of the investment at various phases of the business
Capitalization analysis hinges on:
Pre-money valuation
Post-money valuation
Valuation = $4,000,000
Founders
24% = $960,000
Management
Angel Investors
Venture Capital Investors

6. Valuation
Valuing a company prior to investment (to determine pre-money valuation) involves a great deal of uncertainty
A variety of valuation methods help place a range on the value of a company including:
Comparable
Net present value
(discounted cash flow)
Multiples

7. The Algebra Number of shares, N, Reflects Ownership %
Pre-Money ($) + Investment ($) = Post Money ($)
N Post = N Pre + N Investor
Investment ($)
Post Money ($) =
N Investor
N Post =
N Investor
N Pre + N Investor
% Owned by Investor =
(% Owned by Investor) * (N Pre + N Investor) = N Investor
N Investor =
(% Owned by Investor ) * (N Pre)
(1 - % Owned by Investor )

8. Capitalization Table Lists owners and number of shares
Once shares are issued they are not “taken back” – instead, new shares are issued to new investors based on their target ownership percentage
The owner of the shares can sell their shares (usually subject to restrictions in early stage companies)

9. Management Options
Investors will typically require an option pool for managers and employees
Option Pool Distribution:
Vesting – management and employee options typically vest over 4 to 5 year period
Technology Licensors: ~10%
CFO: 2% - 4%
Management Options: 10 – 20%
CEO: ~10%
Vested over 4 years
Equivalent of ~$50k per year in options
Employee Options: 10 – 20%
Board Member: 0.1% to 1%
Managers in a company (separate from the founders) are often compensated with equity or ownership in the company.
The amount of equity given to a manager depends on the stage of the company, the relevant experience of the manager, and the risk of the venture.

10. Management Options
See D2L

11. Equity in Early Stage Ventures
See D2L

12. Capitalization Analysis Exercise

13. Module 3-2-2 Capitalization - Example
Innovation & Commercialization
Module 3-2-2
Capitalization - Example

14. Capitalization Analysis Exercise

15. Valuation and Ownership
Founders
24% = $960,000
Management
Angel Investors
Venture Capital Investors
Venture Investment
Valuation = $1,250,000
Founders
48% = $600,000
Management
Angel Investors
Angel Investment
Angel or venture capital investments are made in return for an ownership share in the company, or equity.
When the founder takes outside investment they are subject to dilution, or a reduction in their ownership share in the company. Hopefully, the value of the company (the size of the pie) grows faster than the founders ownership share is diluted, so their value at later stages can grow, even though their percentage ownership in the company is reduced. (Unfortunately, it doesn’t always work this way.)
At each stage of investment, the current owners and the investors negotiate a “pre-money valuation” for the company. The value after the investment is equal to the pre-money valuation plus the amount of investment. Using that investment the company achieves milestones, and hopefully grows the value of the company (by significantly more than the amount invested). This way the pre-money valuation at the next stage is greater, and the investors see an appreciation in their investment.
Formation
Valuation = $500,000
Founders
60% = $300,000
Management
Valuation = $200,000
Founders
100% = $200,000
Founding

16. Valuation and Ownership
Angel or venture capital investments are made in return for an ownership share in the company, or equity.
When the founder takes outside investment they are subject to dilution, or a reduction in their ownership share in the company. Hopefully, the value of the company (the size of the pie) grows faster than the founders ownership share is diluted, so their value at later stages can grow, even though their percentage ownership in the company is reduced. (Unfortunately, it doesn’t always work this way.)
At each stage of investment, the current owners and the investors negotiate a “pre-money valuation” for the company. The value after the investment is equal to the pre-money valuation plus the amount of investment. Using that investment the company achieves milestones, and hopefully grows the value of the company (by significantly more than the amount invested). This way the pre-money valuation at the next stage is greater, and the investors see an appreciation in their investment.
Valuation = $200,000
Founders
100% = $200,000
Founding

17. Capitalization Table Example
Stage 1:
Founding
($) %
Pre-Money:
---
Investment:
---
Post Money:
$200k
100%
Shares %
($)
Shareholders
Founder
100
100%
$200k
100
100%
$200k

18. Valuation and Ownership
Angel or venture capital investments are made in return for an ownership share in the company, or equity.
When the founder takes outside investment they are subject to dilution, or a reduction in their ownership share in the company. Hopefully, the value of the company (the size of the pie) grows faster than the founders ownership share is diluted, so their value at later stages can grow, even though their percentage ownership in the company is reduced. (Unfortunately, it doesn’t always work this way.)
At each stage of investment, the current owners and the investors negotiate a “pre-money valuation” for the company. The value after the investment is equal to the pre-money valuation plus the amount of investment. Using that investment the company achieves milestones, and hopefully grows the value of the company (by significantly more than the amount invested). This way the pre-money valuation at the next stage is greater, and the investors see an appreciation in their investment.
Formation
Valuation = $500,000
Founders
60% = $300,000
Management
Valuation = $200,000
Founders
100% = $200,000
Founding

19. Capitalization Table Example
Stage 1:
Founding
Stage 2:
Formation
($) %
($) %
Pre-Money:
---
---
Investment:
---
---
Post Money:
$200k
100%
$500k
100%
Shares %
100
100%
($)
$200k
Shares %
($)
Shareholders
Founder
100
60%
$300k
Management
66.7
40%
$200k
166.7
100%
$500k

20. Valuation and Ownership
Founders
48% = $600,000
Management
Angel Investors
Angel Investment
Angel or venture capital investments are made in return for an ownership share in the company, or equity.
When the founder takes outside investment they are subject to dilution, or a reduction in their ownership share in the company. Hopefully, the value of the company (the size of the pie) grows faster than the founders ownership share is diluted, so their value at later stages can grow, even though their percentage ownership in the company is reduced. (Unfortunately, it doesn’t always work this way.)
At each stage of investment, the current owners and the investors negotiate a “pre-money valuation” for the company. The value after the investment is equal to the pre-money valuation plus the amount of investment. Using that investment the company achieves milestones, and hopefully grows the value of the company (by significantly more than the amount invested). This way the pre-money valuation at the next stage is greater, and the investors see an appreciation in their investment.
Formation
Valuation = $500,000
Founders
60% = $300,000
Management
Valuation = $200,000
Founders
100% = $200,000
Founding

21. Capitalization Table Example
Stage 1:
Founding
Stage 2:
Formation
Stage 3:
Angel Inv.
($) %
($) %
($) %
Pre-Money:
---
---
$1000k
Investment:
---
---
$250k
20%
Post Money:
$200k
100%
$500k
100%
$1250k
Shares %
100
100%
($)
$200k
Shares %
100
60%
66.7
40%
166.7
100%
($)
$300k
$200k
$500k
Shares %
($)
Shareholders
Founder
100
48%
$600k
Management
66.7
32%
$400k
Angel
41.7
20%
$250k
208.3
100%
$1250k

22. Valuation and Ownership
Founders
24% = $960,000
Management
Angel Investors
Venture Capital Investors
Venture Investment
Valuation = $1,250,000
Founders
48% = $600,000
Management
Angel Investors
Angel Investment
Angel or venture capital investments are made in return for an ownership share in the company, or equity.
When the founder takes outside investment they are subject to dilution, or a reduction in their ownership share in the company. Hopefully, the value of the company (the size of the pie) grows faster than the founders ownership share is diluted, so their value at later stages can grow, even though their percentage ownership in the company is reduced. (Unfortunately, it doesn’t always work this way.)
At each stage of investment, the current owners and the investors negotiate a “pre-money valuation” for the company. The value after the investment is equal to the pre-money valuation plus the amount of investment. Using that investment the company achieves milestones, and hopefully grows the value of the company (by significantly more than the amount invested). This way the pre-money valuation at the next stage is greater, and the investors see an appreciation in their investment.
Formation
Valuation = $500,000
Founders
60% = $300,000
Management
Valuation = $200,000
Founders
100% = $200,000
Founding

23. Capitalization Table Example
Stage 1:
Founding
Stage 2:
Formation
Stage 3:
Angel Inv.
Stage 4:
VC Inv.
($) %
($) %
($) %
($) %
Pre-Money:
---
---
$1000k
$2000k
Investment:
---
---
$250k
20%
$2000k
50%
Post Money:
$200k
100%
$500k
100%
$1250k
$4000k
Shares %
100
100%
($)
$200k
Shares %
100
60%
66.7
40%
166.7
100%
($)
$300k
$200k
$500k
Shares %
100
48%
66.7
32%
41.7
20%
208.3
100%
($)
$600k
$400k
$250k
$1250k
Shares %
($)
Shareholders
Founder
100
24%
$960k
Management
66.7
16%
$640k
Angel
41.7
10%
$400k VC
208.3
50%
$2000k
416.7
100%
$4000k

24. Module 3-2-3 Capitalization - Assignment
Innovation & Commercialization
Module 3-2-3
Capitalization - Assignment

25. Capitalization Assignment
Individual Assignment
Capitalization Assignment

26. Individ Assign 5: Capitalization
Individual Assignment
Capitalization Table
Owners
Number Shares
Percentage
Value ($)
Executive Summary

27. A Well-Constructed Spreadsheet
Input cells contained in separate, clearly identified cells (recommend highlighting)
Values should be entered once and referenced for later calculations (i.e. all following calculations should change automatically if input values are altered)
Solutions should be exact – determined by calculation, not by manual iteration
Spreadsheet should be formatted and organized in a logical, easy to follow manner

28. Example Spreadsheet