HOW EQUITY MANAGEMENT IS CHANGING BY HENRY WARD CEO AT ESHARES

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HOW EQUITY MANAGEMENT IS CHANGING

HENRY WARDCEO AT ESHARES

@ESHARES

A Simple Financing

Cap Table

Bob 50% ?

Mary 50% ?

Option Pool 0%

New Investors

Dave ? $1,000,000

Financing Terms

Pre Money Valuation $4,000,000

Post Money Option Pool 0%

What will this be?

New Cap Table

Bob 40% $2,000,000

Mary 40% $2,000,000

Option Pool 0% $0

Dave 20% $1,000,000

100% $5,000,000

Of course!

Two Types of Financings

Equity FinancingConvertible Note“Priced Round”“Debt Round”

Equity Financing Terms

Pre Money ValuationValue of the company prior to the investment of “new money”

Post Money ValuationValue of the company after the investment is made

Option PoolNumber of shares reserved for employee stock options

Add an Option Pool...

Cap Table

Bob 50% ?

Mary 50% ?

Option Pool 0%

New Investors

Dave ? $1,000,000

Financing Terms

Pre Money Valuation $4,000,000

Post Money Option Pool 20%

What will this be? Makes sense!

New Cap Table

Bob 30% $1,500,000

Mary 30% $1,500,000

Option Pool 20% $1,000,000

Dave 20% $1,000,000

100% $5,000,000

Have an Option Pool?

Cap Table

Bob 40% ?

Mary 40% ?

Option Pool 20%

New Investors

Dave ? $1,000,000

Financing Terms

Pre Money Valuation $4,000,000

Post Money Option Pool ?What will this be?

Got it. Everything gets

diluted.

New Cap Table

Bob 32% $1,600,000

Mary 32% $1,600,000

Option Pool 16% $800,000

Dave 20% $1,000,000

100% $5,000,000

More Options Please

Cap Table

Bob 40% ?

Mary 40% ?

Option Pool 20%

New Investors

Dave ? $1,000,000

Financing Terms

Pre Money Valuation $4,000,000

Post Money Option Pool 20%

What will this be?

Sure. Post Money is Fixed.

New Cap Table

Bob 30% $1,500,000

Mary 30% $1,500,000

Option Pool 20% $1,000,000

Dave 20% $1,000,000

100% $5,000,000

More Investors Please

Cap Table

Bob 40% ?

Mary 40% ?

Option Pool 20%

New Investors

Dave ? $1,000,000

Ann ? $1,000,000

Financing Terms

Pre Money Valuation $4,000,000

Post Money Option Pool ?

What will this be?

Rounding errors aside, OK.

New Cap Table

Bob 27% $1,600,000

Mary 27% $1,600,000

Option Pool 13% $800,000

Dave 17% $1,000,000

Ann 17% $1,000,000

100% $6,000,000

Make It Hard Now...

Cap Table

Bob 40% ?

Mary 40% ?

Option Pool 20%

New Investors

Dave 20% ?

Ann ? $500,000

Jeff 5% (max to $400K)

Financing Terms

Pre Money Valuation $4,000,000

Post Money Option Pool 15%

And what if I negotiate the Pre Money Valuation?

What will these be?

Let’s Go Back Here

Cap Table

Bob 50% ?

Mary 50% ?

Option Pool 0%

New Investors

Dave ? $1,000,000

Financing Terms

Pre Money Valuation $4,000,000

Post Money Option Pool 0%

What will this be?

New Cap Table

Bob 40% $2,000,000

Mary 40% $2,000,000

Option Pool 0% $0

Dave 20% $1,000,000

100% $5,000,000

Let’s Sell the Company

Cap Table

Bob 40% -

Mary 40% -

Option Pool 0% -

Dave 20% $1,000,000

100% -

Sales Price = $10M!!!

Payout

Bob 40% $4,000,000

Mary 40% $4,000,000

Option Pool 0% $0

Dave 20% $2,000,000

100% $10,000,000

Easy!

Let’s Sell the Company

Cap Table

Bob 40% -

Mary 40% -

Option Pool 0% -

Dave 20% $1,000,000

100% -

Sales Price = $500K :(

Payout

Bob 40% $0

Mary 40% $0

Option Pool 0% $0

Dave 20% $500,000

100% $500,000

Liquidation Preference!

A Fundamental Law

Assets = Liabilities + Equity

Company Assets - Total Liabilities = Shareholder Equity

(think of it this way....)

$100 $80 $20

A Fundamental Rule

In case of liquidation, Debts (i.e. Liabilities) are always payed before Shareholder Equity

Capital Structure

Assets

Liabilities

Equity

$100

$20

$80

Capital Structure

Assets

Liabilities

Equity

$80

$0 (shareholders lose everything)

$80

Capital Structure

Assets Liabilities$60 $60 (debt holders lose $20)

Payout Graph

$ Sales Price

$ Payout

Debt

Equity

$80

$80

Let’s Sell the Company

Sales Price = $10M

Payout

Bob 40% $4,000,000

Mary 40% $4,000,000

Option Pool 0% $0

Dave 20% $2,000,000

100% $10,000,000

Sales Price = $500K

Payout

Bob 40% $0

Mary 40% $0

Option Pool 0% $0

Dave 20% $500,000

100% $500,000

Preferred Shares behave like Debt!Preferred Shares behave like Equity!

Capital Payout Graph

$ Sales Price

$ Payout

$4M

$5M$1M

$1M

Preferred (Dave)

Common (Bob & Mary)

“Dead Zone” Protection

Accruing DividendsDividends (i.e. 6%) that accrue

Participating (vs Non-Participating)Participating Preferred takes pro-rata portion of any gain after receiving cost basis

Investment MultipliersIncreases the protected return to the investor e.g. 2x returns twice the original investment before common is paid

Accruing Dividends

$ Sales Price

$ Payout

$4M

$5M$1M

$1M

Preferred (Dave)

Common (Bob & Mary)

$1M + 6% * t

Grows over time

Participating Preferred

$ Sales Price

$ Payout

$4M

$5M$1M

$1M

Preferred (Dave)

Common (Bob & Mary)

Preferred Multiplier

$ Sales Price

$ Payout

$4M

$5M$1M

$1M

Preferred (Dave)

Common (Bob & Mary)

$2M

A Few More Terms

Anti DilutionProtects investor ownership percentage in the case of a down round.

WarrantsJust like Options (right to buy at a strike price) except they are add to the fully diluted (instead of from option pool)

Partially Participating Liquidation PreferenceBehaves like Participating Preferred up to a certain threshold which is usually expressed as a multiplier of the investment

What is eShares?

We are an SEC registered Transfer AgentThe first one focused on private companies.

We issue electronic shares, options, debt, and derivativesAnd track ownership, restrictions, and shareholder information.

We automate their approval and compliance

Seller Buyer

Including new issues, transfers, and settlement.

And track the shareholder registryAnd the shareholders portfolios.

Cap Tables

Portfolios

Consolidating equity services for privately owned assets

Transfer Agents Brokerages

Private Company Services

Public Company Services

IPO

For companies and shareholders

Exchanges

Our website describes us bestAnd tells our story

Thanks!