MFIN2210 Chapter Notes - Chapter 4: Preferred Stock
11 Jun 2018
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Chapter 4
Economic Terms of the Term Sheet:
Valuation of Company = Number of shares x Price per share
Price
· Pre-Money: What the investor values the company at today, before investment is made
· Post-Money : Pre-Money +New Investment
Warrant: Similar to a stock option
· Right for an investor to purchase a certain number of shares at a predefined price for a
certain number of years
Bridge Loan – When an investor is planning to do financing, but is waiting for additional
investors to participate
Factors in determining Valuation:
· Stage of Company
o Experience of Entrepreneurs, Amount of money being raised
· Competition with other funding sources
· Experience of entrepreneurs and leadership team
· Size and trendiness of market
· The VC’s natural entry point
· Numbers, Numbers, Numbers
· Current economic climate
Holders of preferred stock can always convert to common stock if it benefits them
Liquidation Preference Overhang- The amount of money that needs to be returned to investors
to satisfy all liquidation preferences before the common holders begin to receive some of the
proceeds
Pay-To-Play
· Investors must keep participating pro-ratably in future financings (paying) in order to not have
their preferred stock converted to common stock (playing) in the company
· Generally good for the company and investors
Vesting:
· Typically, stocks and options vest over 4 years
o You have to be around for 4 years in order to receive everything
· If you leave before, the vesting formula applies and you only get a certain % of your stock
Single-trigger acceleration- Refers to automatic accelerated vesting upon a merger
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Valuation of company = number of shares x price per share. Pre-money: what the investor values the company at today, before investment is made. Right for an investor to purchase a certain number of shares at a predefined price for a certain number of years. Bridge loan when an investor is planning to do financing, but is waiting for additional investors to participate. Stage of company: experience of entrepreneurs, amount of money being raised. Holders of preferred stock can always convert to common stock if it benefits them. Liquidation preference overhang- the amount of money that needs to be returned to investors to satisfy all liquidation preferences before the common holders begin to receive some of the proceeds. Investors must keep participating pro-ratably in future financings (paying) in order to not have their preferred stock converted to common stock (playing) in the company. Generally good for the company and investors.
