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Episode 6

Demonstration of TechFranklin's dilution modelling tool under a variety of Captables and valuations.

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Recall the Captable from the previous video.

Person
Quantity
Founder
4
Angel Investor
2
Person
Quantity
Exercise Price
Employee
2
£100

For the purposes of this illustration we will assume the Ordinary and Ordinary A shares rank pari passu (which is just a silly latin way of saying equally) on a sale.

##### £300 equity value

Suppose the company is sold for £300. This means all the equity has a value of £300. Therefore the value per share is £300/6 (number of shares in issue) = £50

The employee optionholder gets nothing because £50 is less than the exercise price of £100, so there is no point exercising the option.

So the proceeds are distributed as follows:

• Founder receives 4 x £137.50 = £550
• Angel Investor receives 2 x £137.50 = £275

Person
Quantity
Proceeds
Founder
4
£200
67%
Angel Investor
2
£100
33%
Person
Quantity
Exercise Price
Proceeds
Employee
2
£100
£0
0%
##### £900 equity value

Suppose instead the company is sold for £900. Now each share is worth £150 (£900/6) before the exercise of the option.

But this time the employee exercises their option. So they put £100 x 2 = £200 into the company and are issued with 2 shares.

Now the proceeds to be distributed are £900 (from the sale of the company) + £200 (from the exercise of the option) = £1,100.

But now there are 6 + 2 = 8 shares in issue. Therefore each share is worth £1,100/8 = £137.50.

Now the proceeds are distributed as follows:

• Founder receives 4 x £137.50 = £550
• Angel Investor receives 2 x £137.50 = £275
• Employee optionholder receives £75. Reflecting £275 from their shares less £200 from the exercise of the option

Person
Quantity
Proceeds
Founder
4
£550
61%
Angel Investor
2
£275
31%
Person
Quantity
Exercise Price
Proceeds
Employee
2
£100
£75
8%
##### Things to notice

• Notice how the value below £100 per share is protected for the Founder and the Investor by the exercise price of £100
• Notice how the optionholder only benefits from value above £100 per share
• Notice how £550 + £275 + £75 = £900, the value of the company

##### Key takeaway

If you learn only one thing from this blog, I want you to understand this absolutely key concept:

For an option, the exercise price is just as important as the number of shares under option

##### More complicated cases

This example was pretty simple. But how do you deal with Captables with 20+ shareholders and 20+ optionholders all with different exercise prices? Which is what Captables often end up looking like at a sale or IPO.

It turns out the computations are actually quite hard and very difficult to do properly in Excel.

Because of this we have built TechFranklin's which allows you to scenario model any combination of shareholders, optionholders and equity prices to understand how the proceeds are distributed on a sale.

Check it out. It is to use.

#### Next blog:

Episode 6

Demonstration of TechFranklin's dilution modelling tool under a variety of Captables and valuations.