Check out our free dilution modelling tool

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.

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
- Employee optionholder receives £0

Person

Quantity

Proceeds

Founder

4

£200

67%

Angel Investor

2

£100

33%

Person

Quantity

Exercise Price

Proceeds

Employee

2

£100

£0

0%

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%

- 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

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**

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 free dilution modelling tool 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 free to use.