2b:null 2c:["$","title",null,{"children":"Investment Instruments - Terms Glossary | Kevin Xu | Observable"}] 31:T722,postMoneySafeViz = { const vizWidth = width > 600 ? 600 : width; const height = 300; const svg = d3.select(DOM.svg(width < 600 ? width : vizWidth, height)); const root = d3.tree().size([height - margin.top, width < 600 ? width - margin.right - 180 : vizWidth - margin.right - 180])(stratifyData(outcomesData)); const treeGroup = svg.append("g"); const link = treeGroup.append("g") .attr("fill", "none") .attr("stroke", "#555") .attr("transform", `translate(${margin.left}, ${margin.top})`) .selectAll("path") .data(root.links()) .enter().append("path") .attr("d", d3.linkHorizontal() .x(d => d.y) .y(d => d.x)) .attr("stroke-width", 3) .attr("stroke-opacity", 0.8) .attr("stroke", d => d.target.data.color); const node = treeGroup.append("g") .attr("stroke-linejoin", "round") .attr("stroke-width", 3) .attr("transform", `translate(${margin.left}, ${margin.top})`) .selectAll("g") .data(root.descendants()) .enter().append("g"); node.append("circle").attr("r", 6) .attr("fill", "black") .attr("opacity", 0.8) .attr("cx", d => d.y) .attr("cy", d => d.x); node.append("text") .attr("x", d => d.y) .attr("y", d => d.x) .attr("stroke", "white") .attr("stroke-width", 3) .attr("paint-order", "stroke") .attr("fill", "black") .attr("font-size", width < 600 ? 12 : 14) .attr("text-anchor", "middle") .attr("dy", -20) .attr("alignment-baseline", "middle") .text(d => d.data.label); const title = svg.append('g') .append('text') .text('Possible Outcomes') .attr('x', vizWidth / 2) .attr('y', margin.top) .attr('fill', 'black') .attr('text-anchor', 'middle') .attr('font-weight', 'bold'); return svg.node(); }32:T6ed,md`## Discount *Everyone loves a sale.* A discount gives the convertible note investor the right to convert the value of their note at a lower price per share than the price the new Series A investors are purchasing their shares at. Let's take the example of a company that raised a **${usdFormat(noteAmount)}** convertible note with a **${discount}% discount**, and subsequently raises a Series A financing round priced at **${usdFormat(seriesAPricePerShare)} per share**. ${tex.block` \begin{aligned} \text{Note Holder Price} &= \text{Series A Share Price} * \text{(100\% - Discount\%)} \\ \text{Note Holder Price} &= \$${seriesAPricePerShare} * (100\% - ${discount}\%) \\ \text{Note Holder Price} &= \$${seriesAPricePerShare} * (${100 - discount}\%) \\ \text{Note Holder Price} &= \$${seriesAPricePerShare * (1 - discount/100)} \end{aligned} `} thus: ${tex.block` \begin{aligned} \text{Note Holder Shares} &= \text{Note Amount} \div \text{Note Holder Price} \\ \text{Note Holder Shares} &= \$${noteAmount} \div \$${discountConversionPrice} \\ \text{Note Holder Shares} &= ${noteHolderDiscountShares} \end{aligned} `} As a result, the convertible note holder would convert their **${usdFormat(noteAmount)}** note into **${d3.format(',')(noteHolderDiscountShares)}** shares of stock in the company. In contrast, if the convertible note holder converted at the same price as the new Series A investors, they would only have converted their note into ${d3.format(',')(noteAmount / seriesAPricePerShare)} shares ($${d3.format(',')(noteAmount)} / $${seriesAPricePerShare}). | Shares With ${discount}% Discount | Shares Without Discount| | --- | --- | | ${d3.format(',')(noteHolderDiscountShares)} | ${d3.format(',')(noteAmount / seriesAPricePerShare)} | `33:T120c,md`## Valuation Cap *Because fortune-telling is hard.* The valuation cap roughly sets a floor for how much of the company the convertible note investor will own after the note converts (but before the new Series A investors receive their shares). The concern is that if the company ends up being wildly successful and raises a massive Series A round, then the convertible note amount might end up being a very small fraction of the company valuation, which means that the % ownership of the convertible note investor will also be a very small fraction of the company. Let's take the example of a company that raised a **${usdFormat(noteAmount)}** convertible note with a **${usdFormat(valuationCap)} valuation cap**, and subsequently raises a Series A financing round priced at **${usdFormat(seriesAPricePerShare)} per share** at a valuation of **${usdFormat(seriesAValuation)}**.* \**Note: the financing instrument itself will stipulate how this valuation is calculated, but assume for purposes of this walkthrough that ${usdFormat(seriesAValuation)} is the relevant number for converting the note. In reality, this will depend on what gets counted as part of the company capitalization, e.g., option pool, other convertible notes, SAFEs, etc. Each of these figures would play a part in determining the effective valuation for converting the note.* Since the applicable valuation of **${usdFormat(seriesAValuation)}** is ${seriesAValuation > valuationCap ? `greater` : `less`} than the **${usdFormat(valuationCap)}** valuation cap, ${seriesAValuation > valuationCap ? `the note holder will receive the benefit of the valuation cap and convert at **${usdFormat(valuationCap / seriesAValuation * seriesAPricePerShare)}** per share rather than the Series A price of **${usdFormat(seriesAPricePerShare)}** per share. In other words, the note will convert as if the valuation were ${usdFormat(valuationCap)}.` : `the note holder will convert at the Series A price of **${usdFormat(seriesAPricePerShare)}**.`} ${seriesAValuation > valuationCap ? md`${tex.block` \begin{aligned} \text{Note Holder Price} &= \frac{\text{Valuation Cap}}{\text{Company Valuation}} * \text{Series A Share Price} \\ \text{Note Holder Price} &= \frac{\$${valuationCap}}{\$${seriesAValuation}} * \$${seriesAPricePerShare} \\ \text{Note Holder Price} &= ${valuationCap / seriesAValuation} * \$${seriesAPricePerShare} \\ \text{Note Holder Price} &= \$${valuationCap / seriesAValuation * seriesAPricePerShare} \end{aligned} `} thus: ${tex.block` \begin{aligned} \text{Note Holder Shares} &= \text{Note Amount} \div \text{Note Holder Price} \\ \text{Note Holder Shares} &= \$${noteAmount} \div \$${capConversionPrice} \\ \text{Note Holder Shares} &= ${noteHolderValuationCapShares} \end{aligned} `} In this situation, the convertible note investor would convert their note into **${d3.format(',')(noteHolderValuationCapShares)}** shares of the company. Because the company was priced at ${usdFormat(seriesAValuation)} with a per share price of ${usdFormat(seriesAPricePerShare)}, this indicates that there were ${d3.format(',')(seriesAValuation / seriesAPricePerShare)} shares of stock that were figured into the company capitalization. Overall, then, immediately before the Series A investors receive their shares, the note holder would own **${noteHolderValuationCapShares / companyCapitalization * 100}%** of the company (${d3.format(',')(noteHolderValuationCapShares)} / ${d3.format(',')(companyCapitalization)}). Note: again, keep in mind that the convertible instrument may contain additional stipulations that affect conversion that aren't captured in this simplified example. | Shares With Valuation Cap | Shares Without Valuation Cap| | --- | --- | | ${d3.format(',')(noteHolderValuationCapShares)} | ${d3.format(',')(noteAmount / seriesAPricePerShare)} | ` : md` In this situation, the convertible note investor would convert their note into **${d3.format(',')(noteAmount / seriesAPricePerShare)}** shares of the company. Because the company was priced at ${usdFormat(seriesAValuation)} with a per share price of ${usdFormat(seriesAPricePerShare)}, this indicates that there were ${d3.format(',')(seriesAValuation / seriesAPricePerShare)} shares of stock that were figured into the company capitalization. Overall, then, immediately before the Series A investors receive their shares, the note holder would own **${noteAmount / seriesAPricePerShare / companyCapitalization * 100}%** of the company (${d3.format(',')(noteAmount / seriesAPricePerShare)} / ${d3.format(',')(companyCapitalization)}). `} `34:Taa3,md`## Liquidation Preference *Money-back Guarantee!* A liquidation preference applies to shares of Preferred Stock in the event the company: 1. is acquired, 2. merges with another company, or 3. dissolves. Usually described as a multiple, e.g., 1X, 2X, 3X, etc., the owner of the Preferred Stock would receive the right to the product of the value of their stock and the applicable multiple as a payout, prior to distributing any of the remaining proceeds to the holders of Common Stock (i.e., the company founders). ${tex.block` \text{Investor Payout} = \text{Preferred Stock Value} * \text{Liquidation Preference} `} The rationale is that the investor should be entitled to their investment amount back before the holders of Common Stock get any of their funds back in case, for instance, the company fails. For example, if an investor holds $100,000 in Preferred Stock with a 1X liquidation preference, they would receive $100,000 from the proceeds of the sale of the company before any of the holders of Common Stock receive their share of the remainder. If an investor had a 2X liquidation preference, they would receive $200,000. ### Liquidation Preference Overhang A tricky issue can arise with respect to investors who own Preferred Stock as a result of the conversion of a convertible note. Without language that otherwise sets limits on calculating the liquidation preference that applies for the convertible note holder, the convertible note investor may end up receiving more in liquidation preferences than the amount they invested in the company. Let's take the same examples as we saw in the Discount and Valuation Cap sections above: #### Discount For the ${usdFormat(noteAmount)} convertible note with a ${discount}% discount, the investor would receive **${usdFormat(noteHolderDiscountShares * seriesAPricePerShare)}** in liquidation preferences, assuming a 1X liquidation preference, since they would own ${d3.format(',')(noteHolderDiscountShares)} shares of Preferred Stock after converting. #### Valuation Cap For the ${usdFormat(noteAmount)} convertible note with a ${usdFormat(valuationCap)} valuation cap, the investor would receive **${usdFormat(noteHolderValuationCapShares * seriesAPricePerShare)}** in liquidation preferences, assuming a 1X liquidation preference, since they would own ${d3.format(',')(noteHolderValuationCapShares)} shares of Preferred Stock after converting. This could be fine as a reward to the convertible note investors who took a leap of faith very early on in the company, but you can see how this can quickly snowball if the liquidation preference were set at a higher multiple, if the valuation cap were much lower than the Series A valuation, etc. `35:T67a,{ const vizWidth = width > 600 ? 600 : width; const height = 300; const svg = d3.select(DOM.svg(width < 600 ? width : vizWidth, height)); const root = d3.tree().size([width < 600 ? width - margin.right - 180 : vizWidth - margin.right - 180, height - margin.top - margin.bottom - 20])(stratifyData(nonParticipatingGraphDataLiquidationPreference)); const treeGroup = svg.append("g"); const link = treeGroup.append("g") .attr("fill", "none") .attr("stroke", "#555") .attr("transform", `translate(${margin.left}, ${margin.top + margin.bottom})`) .selectAll("path") .data(root.links()) .enter().append("path") .attr("d", d3.linkVertical() .x(d => d.x) .y(d => d.y)) .attr("stroke-width", 3) .attr("stroke-opacity", 0.8) .attr("stroke", d => d.target.data.color); const node = treeGroup.append("g") .attr("stroke-linejoin", "round") .attr("stroke-width", 3) .attr("transform", `translate(${margin.left}, ${margin.top + margin.bottom})`) .selectAll("g") .data(root.descendants()) .enter().append("g"); node.append("circle").attr("r", 6) .attr("fill", "black") .attr("opacity", 0.8) .attr("cx", d => d.x) .attr("cy", d => d.y); node.append("text") .attr("x", d => d.x) .attr("y", d => d.y + 5) .attr("stroke", "white") .attr("stroke-width", 3) .attr("paint-order", "stroke") .attr("fill", "black") .attr("font-size", width < 600 ? 10 : 14) .attr("text-anchor", "middle") .attr("dy", -20) .attr("alignment-baseline", "middle") .text(d => d.data.label); return svg.node(); }36:T665,{ const vizWidth = width > 600 ? 600 : width; const height = 300; const svg = d3.select(DOM.svg(width < 600 ? width : vizWidth, height)); const root = d3.tree().size([width < 600 ? width - margin.right - 180 : vizWidth - margin.right - 180, height - margin.top - margin.bottom - 20])(stratifyData(nonParticipatingGraphData)); const treeGroup = svg.append("g"); const link = treeGroup.append("g") .attr("fill", "none") .attr("stroke", "#555") .attr("transform", `translate(${margin.left}, ${margin.top + margin.bottom})`) .selectAll("path") .data(root.links()) .enter().append("path") .attr("d", d3.linkVertical() .x(d => d.x) .y(d => d.y)) .attr("stroke-width", 3) .attr("stroke-opacity", 0.8) .attr("stroke", d => d.target.data.color); const node = treeGroup.append("g") .attr("stroke-linejoin", "round") .attr("stroke-width", 3) .attr("transform", `translate(${margin.left}, ${margin.top + margin.bottom})`) .selectAll("g") .data(root.descendants()) .enter().append("g"); node.append("circle").attr("r", 6) .attr("fill", "black") .attr("opacity", 0.8) .attr("cx", d => d.x) .attr("cy", d => d.y); node.append("text") .attr("x", d => d.x) .attr("y", d => d.y + 5) .attr("stroke", "white") .attr("stroke-width", 3) .attr("paint-order", "stroke") .attr("fill", "black") .attr("font-size", width < 600 ? 10 : 14) .attr("text-anchor", "middle") .attr("dy", -20) .attr("alignment-baseline", "middle") .text(d => d.data.label); return svg.node(); }37:T780,{ const vizWidth = width > 600 ? 600 : width; const height = 300; const svg = d3.select(DOM.svg(width < 600 ? width : vizWidth, height)); const root = d3.tree().size([width < 600 ? width - margin.right - 180 : vizWidth - margin.right - 180, height - margin.top - margin.bottom - 20])(stratifyData(participatingGraphData)); const treeGroup = svg.append("g"); const link = treeGroup.append("g") .attr("fill", "none") .attr("stroke", "#555") .attr("transform", `translate(${margin.left}, ${margin.top + margin.bottom})`) .selectAll("path") .data(root.links()) .enter().append("path") .attr("d", d3.linkVertical() .x(d => d.x) .y(d => d.y)) .attr("stroke-width", 3) .attr("stroke-opacity", 0.8) .attr("stroke", d => d.target.data.color); const node = treeGroup.append("g") .attr("stroke-linejoin", "round") .attr("stroke-width", 3) .attr("transform", `translate(${margin.left}, ${margin.top + margin.bottom})`) .selectAll("g") .data(root.descendants()) .enter().append("g"); node.append("circle").attr("r", 6) .attr("fill", "black") .attr("opacity", 0.8) .attr("cx", d => d.x) .attr("cy", d => d.y); node.append("text") .attr("x", d => d.x) .attr("y", d => d.y + 5) .attr("stroke", "white") .attr("stroke-width", 3) .attr("paint-order", "stroke") .attr("fill", "black") .attr("font-size", width < 600 ? 12 : 14) .attr("text-anchor", "middle") .attr("dy", -20) .attr("alignment-baseline", "middle") .text(d => d.data.label); // const title = svg.append('g') // .append('text') // .text('Distribution of Company Sale Proceeds ($)') // .attr('x', vizWidth / 2) // .attr('y', margin.top) // .attr('fill', 'black') // .attr('text-anchor', 'middle') // .attr('font-weight', 'bold'); return svg.node(); }38:T24c7,md`## Weighted Average Anti-Dilution Anti-dilution provisions serve to offset an investor's losses in the case of a "down round," where a company sells its shares for a price that is less than that of an earlier financing round. Let's run through the examples given by Yokum Taku in his article [here](http://www.startupcompanylawyer.com/2007/08/04/what-is-weighted-average-anti-dilution-protection/). ### Broad-based Weighted Average Weighted average anti-dilution often uses the following formula: ${tex.block` \text{New Conversion Price} = \text{Existing Conversion Price} * \frac{A + B}{A + C} `} where: - A is the total number of shares outstanding (as converted to Common Stock) prior to the down round - B is the number of shares the down round investor would have bought if that investor bought their shares at the Existing Conversion Price - C is the number of shares the down round investor actually bought The company's cap table immediately prior to the down round is as follows: | Type | Number | | --- | --- | | Common Stock | ${d3.format(',')(weightedAvgCommon)}| | Series A Preferred Stock (issued at $${weightedAvgSeriesAPrice}/share) | ${d3.format(',')(weightedAvgSeriesANumberOfShares)} | | Series B Preferred Stock (issued at $${weightedAvgSeriesBPrice}/share) | ${d3.format(',')(weightedAvgSeriesBNumberOfShares)} | | Options | ${d3.format(',')(weightedAvgOptions)} | | Total | ${d3.format(',')(broadBasedTotal)} | The company then raises a down round of ${d3.format(',')(weightedAvgSeriesCNumberOfShares)} shares of Series C Preferred Stock at ${usdFormat(weightedAvgSeriesCPrice)}/share for $${d3.format(',')(weightedAvgSeriesCPrice * weightedAvgSeriesCNumberOfShares)}. #### Series A Investors For the Series A investors, their new conversion price, calculated using a broad-based weighted average anti-dilution formula would be as follows: ${tex.block` \begin{aligned} \text{New Conversion Price} &= \$${weightedAvgSeriesAPrice} * \frac{${d3.format(',')(broadBasedTotal)} + \frac{\$${d3.format(',')(weightedAvgSeriesCGrossProceeds)}}{\$${weightedAvgSeriesAPrice}}}{${d3.format(',')(broadBasedTotal)} + ${d3.format(',')(weightedAvgSeriesCNumberOfShares)}} \\ \text{New Conversion Price} &= \$${weightedAvgSeriesAPrice} * \frac{${d3.format(',')(broadBasedTotal)} + ${d3.format(',')(weightedAvgSeriesCGrossProceeds / weightedAvgSeriesAPrice)}}{${d3.format(',')(broadBasedTotal)} + ${d3.format(',')(weightedAvgSeriesCNumberOfShares)}} \\ \text{New Conversion Price} &= \$${weightedAvgSeriesAPrice} * \frac{${d3.format(',')(broadBasedTotal + weightedAvgSeriesCGrossProceeds / weightedAvgSeriesAPrice)}}{${d3.format(',')(broadBasedTotal + weightedAvgSeriesCNumberOfShares)}} \\ \text{New Conversion Price} &= \$${weightedAvgBroadBasedSeriesAConversionPrice} \end{aligned} `} Using the New Conversion Price, the Series A investors would be able to convert their ${d3.format(',')(weightedAvgSeriesANumberOfShares)} shares of Preferred Stock into ${d3.format(',')(Math.floor(weightedAvgSeriesANumberOfShares * weightedAvgSeriesAPrice / weightedAvgBroadBasedSeriesAConversionPrice))} shares of Common Stock. ${tex.block` \begin{aligned} \text{Shares of Common Stock} &= \text{Shares of Preferred Stock} * \frac{\text{Old Conversion Price}}{\text{New Conversion Price}} \\ \text{Shares of Common Stock} &= \text{${d3.format(',')(weightedAvgSeriesANumberOfShares)}} * \frac{\$${weightedAvgSeriesAPrice}}{\$${weightedAvgBroadBasedSeriesAConversionPrice}} \\ \text{Shares of Common Stock} &= \text{${d3.format(',')(weightedAvgSeriesANumberOfShares * weightedAvgSeriesAPrice / weightedAvgBroadBasedSeriesAConversionPrice)}} \end{aligned} `} #### Series B Investors For the Series B investors, their new conversion price, calculated using a broad-based weighted average anti-dilution formula would be as follows: ${tex.block` \begin{aligned} \text{New Conversion Price} &= \$${weightedAvgSeriesBPrice} * \frac{${d3.format(',')(broadBasedTotal)} + \frac{\$${d3.format(',')(weightedAvgSeriesCGrossProceeds)}}{\$${weightedAvgSeriesBPrice}}}{${d3.format(',')(broadBasedTotal)} + ${d3.format(',')(weightedAvgSeriesCNumberOfShares)}} \\ \text{New Conversion Price} &= \$${weightedAvgSeriesBPrice} * \frac{${d3.format(',')(broadBasedTotal)} + ${d3.format(',')(weightedAvgSeriesCGrossProceeds / weightedAvgSeriesBPrice)}}{${d3.format(',')(broadBasedTotal)} + ${d3.format(',')(weightedAvgSeriesCNumberOfShares)}} \\ \text{New Conversion Price} &= \$${weightedAvgSeriesBPrice} * \frac{${d3.format(',')(broadBasedTotal + weightedAvgSeriesCGrossProceeds / weightedAvgSeriesBPrice)}}{${d3.format(',')(broadBasedTotal + weightedAvgSeriesCNumberOfShares)}} \\ \text{New Conversion Price} &= \$${weightedAvgBroadBasedSeriesBConversionPrice} \end{aligned} `} Using the New Conversion Price, the Series B investors would be able to convert their ${d3.format(',')(weightedAvgSeriesBNumberOfShares)} shares of Preferred Stock into ${d3.format(',')(Math.floor(weightedAvgSeriesBNumberOfShares * weightedAvgSeriesBPrice / weightedAvgBroadBasedSeriesBConversionPrice))} shares of Common Stock. ${tex.block` \begin{aligned} \text{Shares of Common Stock} &= \text{Shares of Preferred Stock} * \frac{\text{Old Conversion Price}}{\text{New Conversion Price}} \\ \text{Shares of Common Stock} &= \text{${d3.format(',')(weightedAvgSeriesBNumberOfShares)}} * \frac{\$${weightedAvgSeriesBPrice}}{\$${weightedAvgBroadBasedSeriesBConversionPrice}} \\ \text{Shares of Common Stock} &= ${d3.format(',')(weightedAvgSeriesBNumberOfShares * weightedAvgSeriesBPrice / weightedAvgBroadBasedSeriesBConversionPrice)} \end{aligned} `} ### Narrow-based Weighted Average In contrast to the broad-based weighted average formula, instead of defining ${tex`A`} as total common stock outstanding, in a narrow-based weighted average formula, ${tex.block`A = \text{Number of Shares in the Applicable Series}`} which has the effect of giving a larger adjustment to the benefit of the investors. #### Series A Investors For the Series A investors, ${tex`A`} is ${d3.format(',')(weightedAvgSeriesANumberOfShares)}, the number of Series A Preferred Stock. ${tex.block` \begin{aligned} \text{New Conversion Price} &= \$${weightedAvgSeriesAPrice} * \frac{${d3.format(',')(weightedAvgSeriesANumberOfShares)} + \frac{\$${d3.format(',')(weightedAvgSeriesCGrossProceeds)}}{\$${weightedAvgSeriesAPrice}}}{${d3.format(',')(weightedAvgSeriesANumberOfShares)} + ${d3.format(',')(weightedAvgSeriesCNumberOfShares)}} \\ \text{New Conversion Price} &= \$${weightedAvgSeriesAPrice} * \frac{${d3.format(',')(weightedAvgSeriesANumberOfShares)} + ${d3.format(',')(weightedAvgSeriesCGrossProceeds / weightedAvgSeriesAPrice)}}{${d3.format(',')(weightedAvgSeriesANumberOfShares)} + ${d3.format(',')(weightedAvgSeriesCNumberOfShares)}} \\ \text{New Conversion Price} &= \$${weightedAvgSeriesAPrice} * \frac{${d3.format(',')(weightedAvgSeriesANumberOfShares + (weightedAvgSeriesCGrossProceeds / weightedAvgSeriesAPrice))}}{${d3.format(',')(weightedAvgSeriesANumberOfShares + weightedAvgSeriesCNumberOfShares)}} \\ \text{New Conversion Price} &= \$${weightedAvgNarrowBasedSeriesAConversionPrice} \end{aligned} `} ${tex.block` \begin{aligned} \text{Shares of Common Stock} &= \text{Shares of Preferred Stock} * \frac{\text{Old Conversion Price}}{\text{New Conversion Price}} \\ \text{Shares of Common Stock} &= ${d3.format(',')(weightedAvgSeriesANumberOfShares)} * \frac{\$${weightedAvgSeriesAPrice}}{\$${weightedAvgNarrowBasedSeriesAConversionPrice}} \\ \text{Shares of Common Stock} &= {${d3.format(',')(Math.floor(weightedAvgSeriesANumberOfShares * weightedAvgSeriesAPrice / weightedAvgNarrowBasedSeriesAConversionPrice))}} \end{aligned} `} #### Series B Investors For the Series B investors, ${tex`A`} is ${d3.format(',')(weightedAvgSeriesBNumberOfShares)}, the number of Series B Preferred Stock. ${tex.block` \begin{aligned} \text{New Conversion Price} &= \$${weightedAvgSeriesBPrice} * \frac{${d3.format(',')(weightedAvgSeriesBNumberOfShares)} + \frac{\$${d3.format(',')(weightedAvgSeriesCGrossProceeds)}}{\$${weightedAvgSeriesBPrice}}}{${d3.format(',')(weightedAvgSeriesBNumberOfShares)} + ${d3.format(',')(weightedAvgSeriesCNumberOfShares)}} \\ \text{New Conversion Price} &= \$${weightedAvgSeriesBPrice} * \frac{${d3.format(',')(weightedAvgSeriesBNumberOfShares)} + ${d3.format(',')(weightedAvgSeriesCGrossProceeds / weightedAvgSeriesBPrice)}}{${d3.format(',')(weightedAvgSeriesBNumberOfShares)} + ${d3.format(',')(weightedAvgSeriesCNumberOfShares)}} \\ \text{New Conversion Price} &= \$${weightedAvgSeriesBPrice} * \frac{${d3.format(',')(weightedAvgSeriesBNumberOfShares + weightedAvgSeriesCGrossProceeds / weightedAvgSeriesBPrice)}}{${d3.format(',')(weightedAvgSeriesBNumberOfShares + weightedAvgSeriesCNumberOfShares)}} \\ \text{New Conversion Price} &= \$${weightedAvgNarrowBasedSeriesBConversionPrice} \end{aligned} `} ${tex.block` \begin{aligned} \text{Shares of Common Stock} &= \text{Shares of Preferred Stock} * \frac{\text{Old Conversion Price}}{\text{New Conversion Price}} \\ \text{Shares of Common Stock} &= ${d3.format(',')(weightedAvgSeriesBNumberOfShares)} * \frac{\$${weightedAvgSeriesBPrice}}{\$${weightedAvgNarrowBasedSeriesBConversionPrice}} \\ \text{Shares of Common Stock} &= {${d3.format(',')(Math.floor(weightedAvgSeriesBNumberOfShares * weightedAvgSeriesBPrice / weightedAvgNarrowBasedSeriesBConversionPrice))}} \end{aligned} `} `39:[] 2f:{"id":"7bf4687ef710691c","slug":"investment-instruments-terms-glossary","title":"Investment Instruments - Terms Glossary","thumbnail":"803d4c7c72f2e2d9da432465c730f7b3386eb4edf1489a5f64eb5b6754252ba7","access_level":"public","create_time":"$D2019-08-21T15:26:05.090Z","update_time":"$D2019-12-30T02:31:51.358Z","view_time":null,"first_public_time":"$D2019-12-30T03:42:17.976Z","fork":false,"stars":4,"starred":false,"owner":{"type":"team","id":"f04c66ca9cd6f30f","login":"khxu","name":"Kevin Xu","avatar_url":"https://avatars-next.observableusercontent.com/95f43d42f7b1b38b7500f5536a36649032e80656a3012bd0a58eded804edc8d6","tier":"starter_2024"},"version":869,"publish_version":869,"role":null,"authored":false,"authors":[{"type":"individual","id":"d78350930352ba0b","login":"khxu","name":"Kevin Xu","avatar_url":"https://avatars-next.observableusercontent.com/95f43d42f7b1b38b7500f5536a36649032e80656a3012bd0a58eded804edc8d6","tier":null}],"members":[{"type":"individual","id":"d78350930352ba0b","login":"khxu","name":"Kevin Xu","avatar_url":"https://avatars-next.observableusercontent.com/95f43d42f7b1b38b7500f5536a36649032e80656a3012bd0a58eded804edc8d6","tier":null,"role":"editor"}],"comments":[],"custom_thumbnail":false,"trashed":false,"subscribed":null,"forks":1,"collection":null,"type":"notebook","body":{"title":"Investment Instruments - Terms Glossary","cells":[{"id":0,"value":"md`# Investment Instruments - Terms Glossary`","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":7,"value":"md`*How much of the company will I have?* \n\nThe (potentially) million-dollar question for founders and investors.`","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":43,"value":"$31","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":106,"value":"md`Here are some key terms found in the investment instruments of early stage companies.`","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":4,"value":"$32","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":12,"value":"$33","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":477,"value":"md`### Change the Numbers!\nWant more examples? Change the numbers in the input fields below and click the update button to run the above analyses with different values.\n`","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":108,"value":"viewof noteAmount = number({\n placeholder: \"Value\", \n description: \"Change the value of the convertible note\",\n value: 100000,\n submit: \"Update Note Amount\",\n title: \"Note Amount ($)\"\n})","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":153,"value":"viewof discount = number({\n placeholder: \"Value\", \n description: \"Change the value of the discount\",\n value: 20,\n min: 0,\n max: 100,\n submit: \"Update Discount Amount\",\n title: \"Discount (%)\"\n})","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":181,"value":"viewof seriesAPricePerShare = number({\n placeholder: \"Value\", \n description: \"Change the price per share (in $)\",\n value: 1,\n submit: \"Update Price Per Share (in $)\",\n title: \"Series A Price Per Share ($)\"\n})","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":161,"value":"viewof valuationCap = number({\n placeholder: \"Value\", \n description: \"Change the value of the valuation cap\",\n value: 2000000,\n submit: \"Update Valuation Cap Amount\",\n title: \"Valuation Cap ($)\"\n})","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":295,"value":"viewof seriesAValuation = number({\n placeholder: \"Value\", \n description: \"Change the value of the Series A Valuation\",\n value: 4000000,\n submit: \"Update Series A Valuation Amount\",\n title: \"Series A Valuation ($)\"\n})","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":486,"value":"$34","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":537,"value":"md`## Participating vs. Non-Participating Preferred Stock\nPreferred Stock is better than Common Stock in every way. Let's recap some of the key advantages. Holders of Preferred Stock (the investors):\n\n- Get paid before the holders of Common Stock (the founders);\n- Get veto rights over various company actions; and\n- Get to convert their Preferred Stock into Common Stock at their discretion.\n\nIt's that last bullet point where we need to consider the impact of whether or not the Preferred Stock is Participating or Non-Participating, as that will affect how the proceeds of a company sale are distributed.\n\n### Non-Participating Preferred Stock\n`","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":851,"value":"md`Either`","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":579,"value":"$35","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":654,"value":"md`or`","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":652,"value":"$36","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":645,"value":"md`Investors who own Non-Participating Preferred Stock will receive the greater of their liquidation preference or the value of their Preferred Stock as converted into Common Stock.`","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":625,"value":"md`### Participating Preferred Stock`","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":636,"value":"$37","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":671,"value":"md`Investors who own Participating Preferred Stock will receive their liquidation preference first, and then convert their Preferred Stock into Common Stock, allowing the investors to share (again) in the remaining sale proceeds.`","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":553,"value":"$38","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":735,"value":"viewof weightedAvgCommon = number({\n placeholder: \"Amount\", \n description: \"Change the amount of Common Stock\",\n value: 1500000,\n submit: \"Update Amount of Common Stock\",\n title: \"Common Stock\"\n})","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":739,"value":"viewof weightedAvgSeriesAPrice = number({\n placeholder: \"Value\", \n description: \"Change the price per share of Series A Preferred Stock\",\n value: 1,\n submit: \"Update Series A Price per Share ($)\",\n title: \"Series A Share Price ($)\"\n})","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":752,"value":"viewof weightedAvgSeriesANumberOfShares = number({\n placeholder: \"Value\", \n description: \"Change the number of Series A Preferred Stock issued\",\n value: 2500000,\n submit: \"Update Series A Number of Shares\",\n title: \"Number of Series A Shares Issued\"\n})","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":744,"value":"viewof weightedAvgSeriesBPrice = number({\n placeholder: \"Value\", \n description: \"Change the price per share of Series B Preferred Stock\",\n value: 2,\n submit: \"Update Series B Price per Share ($)\",\n title: \"Series B Share Price ($)\"\n})","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":755,"value":"viewof weightedAvgSeriesBNumberOfShares = number({\n placeholder: \"Value\", \n description: \"Change the number of Series B Preferred Stock issued\",\n value: 2000000,\n submit: \"Update Series B Number of Shares\",\n title: \"Number of Series B Shares Issued\"\n})","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":759,"value":"viewof weightedAvgOptions = number({\n placeholder: \"Amount\", \n description: \"Change the Amount of Equity in Options\",\n value: 1000000,\n submit: \"Update Amount of Options\",\n title: \"Number of Equity in Options\"\n})","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":773,"value":"viewof weightedAvgSeriesCPrice = number({\n placeholder: \"Value\", \n description: \"Change the price per share of Series C Preferred Stock\",\n value: 0.5,\n submit: \"Update Series C Price per Share ($)\",\n title: \"Series C Share Price ($)\"\n})","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":776,"value":"viewof weightedAvgSeriesCNumberOfShares = number({\n placeholder: \"Value\", \n description: \"Change the number of Series C Preferred Stock issued\",\n value: 2000000,\n submit: \"Update Series C Number of Shares\",\n title: \"Number of Series C Shares Issued\"\n})","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":855,"value":"md`\n## Helpful Learning Resources\n\n- [Venture Dealr - a VC financing scrolly-teller](http://dlopuch.github.io/venture-dealr/)\n- [National Venture Capital Association (NVCA) Model Legal Forms](https://nvca.org/model-legal-documents/)\n- [Yokum Taku's excellent blog](http://www.startupcompanylawyer.com/), sharing his thoughts as an attorney\n- [Mark Suster's excellent blog](https://bothsidesofthetable.com/), sharing his thoughts as a VC investor\n`","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":794,"value":"weightedAvgBroadBasedSeriesAConversionPrice = weightedAvgSeriesAPrice * (broadBasedTotal + weightedAvgSeriesCPrice * weightedAvgSeriesCNumberOfShares / weightedAvgSeriesAPrice)/(broadBasedTotal + weightedAvgSeriesCNumberOfShares)","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":801,"value":"weightedAvgBroadBasedSeriesBConversionPrice = weightedAvgSeriesBPrice * (broadBasedTotal + weightedAvgSeriesCPrice * weightedAvgSeriesCNumberOfShares / weightedAvgSeriesBPrice)/(broadBasedTotal + weightedAvgSeriesCNumberOfShares)","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":828,"value":"weightedAvgNarrowBasedSeriesAConversionPrice = weightedAvgSeriesAPrice * (weightedAvgSeriesANumberOfShares + weightedAvgSeriesCPrice * weightedAvgSeriesCNumberOfShares / weightedAvgSeriesAPrice)/(weightedAvgSeriesANumberOfShares + weightedAvgSeriesCNumberOfShares)","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":825,"value":"weightedAvgNarrowBasedSeriesBConversionPrice = weightedAvgSeriesBPrice * (weightedAvgSeriesBNumberOfShares + weightedAvgSeriesCPrice * weightedAvgSeriesCNumberOfShares / weightedAvgSeriesBPrice)/(weightedAvgSeriesBNumberOfShares + weightedAvgSeriesCNumberOfShares)","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":805,"value":"weightedAvgSeriesCGrossProceeds = weightedAvgSeriesCPrice * weightedAvgSeriesCNumberOfShares","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":763,"value":"broadBasedTotal = weightedAvgCommon + weightedAvgSeriesANumberOfShares + weightedAvgSeriesBNumberOfShares + weightedAvgOptions","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":576,"value":"nonParticipatingGraphData = [\n {parent: '', id: 'root', label: 'Proceeds from Sale'},\n {parent: 'root', id: 'investorsCommon', label: 'Investors as Converted to Common', color: 'steelblue'},\n {parent: 'root', id: 'foundersCommon', label: 'Founders', color: 'orange'}\n]","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":663,"value":"nonParticipatingGraphDataLiquidationPreference = [\n {parent: '', id: 'root', label: 'Proceeds from Sale'},\n {parent: 'root', id: 'investorsLiquidationPreference', label: \"Investors' Liquidation Preference\", color: 'steelblue'},\n {parent: 'root', id: 'foundersCommon', label: 'Founders', color: 'orange'}\n]","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":628,"value":"participatingGraphData = [\n {parent: '', id: 'root', label: 'Proceeds from Sale'},\n {parent: 'root', id: 'investorsLiquidationPreference', label: \"Investors' Liquidation Preference\", color: 'steelblue'},\n {parent: 'investorsLiquidationPreference', id: 'investorsCommon', label: 'Investors as Converted to Common', color: 'steelblue'},\n {parent: 'investorsLiquidationPreference', id: 'foundersCommon', label: 'Founders', color: 'orange'}\n]","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":460,"value":"companyCapitalization = seriesAValuation / seriesAPricePerShare","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":238,"value":"noteHolderDiscountShares = noteAmount / discountConversionPrice","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":451,"value":"noteHolderValuationCapShares = noteAmount / capConversionPrice","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":284,"value":"capConversionPrice = valuationCap / seriesAValuation * seriesAPricePerShare","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":230,"value":"discountConversionPrice = seriesAPricePerShare * (100 - discount) * 0.01","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":37,"value":"margin = ({\n top: 20,\n bottom: 20,\n left: 100,\n right: 50\n})","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":40,"value":"stratifyData = d3.stratify()\n .id(d => d.id)\n .parentId(d => d.parent)","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":31,"value":"outcomesData = [\n {parent: '', id: 'root', label: 'Company Raises Investment'},\n {parent: 'root', id: 'investment', label: 'Growth: Company Raises Series A', color: 'green'},\n {parent: 'root', id: 'acquisition', label: 'Exit: Company is Acquired/Goes Public', color: 'green'},\n {parent: 'root', id: 'dissolution', label: 'Failure: Company Dissolves', color: 'red'}\n]","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":34,"value":"d3 = require('d3')","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":110,"value":"import {number} from \"@jashkenas/inputs\"","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":132,"value":"usdFormat = d3.format('$,.2f')","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":310,"value":"embed = require(\"vega-embed\")","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"},{"id":404,"value":"html``","pinned":false,"hidden":false,"mode":"ojs","author":"$undefined","summary":"$undefined"}],"files":"$W39","stdlib":"1","titling":"auto"}} 30:"$2f:body"