How do you calculate Series A price per share?

May 21, 2007

The formula is:

[Series A price per share] = [valuation] / [fully-diluted pre-money shares]

Obviously, there are two ways to affect the Series A price per share (and the resulting dilution to pre-Series A stockholders):  (1) change the valuation, or (2) change the number of fully-diluted pre-money shares.  Arguing for a change in valuation is probably difficult.  However, arguing for a different number of fully-diluted pre-money shares might be an easier way to affect the Series A price per share.

Fully-diluted pre-money shares typically includes (1) all outstanding common stock, (2) all outstanding preferred stock (if any, on a converted to common basis), (3) outstanding warrants, (4) outstanding options, (5) options reserved for future grant, and (6) any other convertible securities on an as converted to common basis.

Decreasing the size of the option pool is one way to increase the Series A price per share.  Series A investors want to make sure that there is a sufficient option pool for future hires, and that the dilution for the option pool is borne by pre-Series A stockholders. A company may argue that the size of the option pool does not need to be as large as requested by the Series A investors. Generally, the option pool needs to be large enough to hire necessary people through the next round of financing (or a time period such as 12 to 18 months if the company does not anticipate another round of financing). Please read the Venture Hacks article on the Option Pool Shuffle for more explanation.

In addition, there are some plausible arguments that shares issued upon conversion of a convertible note or warrants issued in connection with the convertible note prior to a Series A financing should not be counted in full-diluted pre-money shares.  Please read the comments to the Option Pool Shuffle article for more details.

Comments

  • https://www.chroniclegraphics.com Jim Black

    I have a related question. I am CEO of a company that is still at the “friends and family” funding stage. In addition to the common shares that are owned outright by the founders, we have issued some warrants and we have also established a pool of common stock to be used as equity compensation. My question is: should we count the warrants and the option pool in determining the price per share as we compensate people with equity?

  • http://www.startupcompanylawyer.com Yokum

    Conceptually yes, but the situation is different. In a venture financing, the valuation is set by an arms-length process. In setting the valuation of the company to determine how many shares to grant to a service provider, the valuation is likely not rigorously challenged. Thus, while it is theoretically correct to include options and warrants, most people receiving the equity are not sophisticated enough the challenge the underlying assumptions.