INTRODUCTION

You raised series A venture capital last year when your company was valued at $30 million. Now, you need to
raise the series B, but the investors tell you that your company is only worth $20 million. What does this mean
you? And, what is the effect of the "Anti-dilition Provision" in the series A investors' Term Sheet?

This workbook will calculate how much common shareholders will be diluted in the series B venture financing
(preferred stock) which is priced lower than the first round venture financing.

You can see the dilution where the series A financing provides for 2 scenarios: Simple Scenario and Normal
Scenario. In the aimple scenario, you know the purchase price and shares number for Series B investor. But this
is not the normal scenario, where you only know the pre-money valuation and the investment amount for the
Series B investor. In each scenario, there are there situations:
1 - no adjustment to the conversion price
2 - partial adjustment to the conversion price: (Broad-based weighted average & Narrow-based weighted
average)
3 - full adjustment of the conversion price: (Full ratched)

The workbook includes 3 worksheets:

Introduction
Assumptions and Results
Simple Scenario (Calculation Details)
Normal Scenario (Calculation Details)

Just fill in the highlighted assumptions on the worksheet -- 'Assumptions and Results'.

Drafted by: Sam GUI, Dec. 2007

Personal Blog: Venture Capital Consultant
 Simple Scenario
Assumptions
Founder's Common share 40,000,000
Series A Preferred Purchase Price $1.00
Series A Preferred share 10,000,000
Series B Preferred Purchase Price $0.50
Series B Preferred share 5,000,000

Company Ownership
Before Non Weighted Average
Series B anti-dilution Broad based
Common share 80.00% 72.73% 72.10%
Series A investor 20.00% 18.18% 18.88%
Series B investor 0.00% 9.09% 9.01%

Valuation, Purchase Price & Conversion Price

Non Weighted Average
anti-dilution Broad based
Series A conversion price $1.00 $0.95
Series B purchase price $0.50 $0.50
Series A post-money valuation $50,000,000 $50,000,000
Series B pre-money valuation $25,000,000 $25,238,095
Series A as-converted common shares 10,000,000 10,476,190
Series B preferred shares 5,000,000 5,000,000
Series B investment 2,500,000 2,500,000

Normal Scenario
Assumptions
Founder's Common share 8,000,000
Series A Investment $2,000,000
Series A Preferred share % 20.00%
Series B Investment $8,000,000
Series B Pre-money Valuation $8,000,000

Company Ownership
Before Non Weighted Average
Series B anti-dilution Broad based
Common share 80.00% 40.00% 39.02%
Series A investor 20.00% 10.00% 10.98%
Series B investor 0.00% 50.00% 50.00%

Valuation, Purchase Price & Conversion Price

Non Weighted Average
anti-dilution Broad based
Series A conversion price $1.00 $0.8889
Series B purchase price $0.80 $0.7805
Series A post-money valuation $10,000,000 $10,000,000
Series B pre-money valuation $8,000,000 $8,000,000
Series A as-converted common shares 2,000,000 2,250,000
Series B preferred shares 10,000,000 10,250,000
Series B investment 8,000,000 8,000,000
Weighted Average Full Ratchet
Narrow based anti-dilution
70.18% 61.54%
21.05% 30.77%
8.77% 7.69%

Weighted Average Full Ratchet

Narrow based anti-dilution
$0.83 $0.50
$0.50 $0.50
$50,000,000 $50,000,000
$26,000,000 $30,000,000
12,000,000 20,000,000
5,000,000 5,000,000
2,500,000 2,500,000

Weighted Average Full Ratchet

Narrow based anti-dilution
38.10% 37.50%
11.90% 12.50%
50.00% 50.00%

Weighted Average Full Ratchet

Narrow based anti-dilution
$0.8000 $0.75
$0.7619 $0.75
$10,000,000 $10,000,000
$8,000,000 $8,000,000
2,500,000 2,666,667
10,500,000 10,666,667
8,000,000 8,000,000
 Calculation Details
Assumptions
FS Founder's Common share 40,000,000
OP Series A Preferred Purchase Price $1.00
AS Series A Preferred share 10,000,000
NP Series B Preferred Purchase Price $0.50
BS Series B Preferred share 5,000,000
AI Series A Investment 10,000,000
BI Series B Investment 2,500,000

Before Series B Financing

Common share 40,000,000
Series A Conversion Price $1.00
Series A Common share on As-converted Base 10,000,000
Total Fully Diluted Shares 50,000,000
Series A Post-money Valuation 50,000,000

Non anti-dilution
Common share 40,000,000
Series A Conversion Price $1.00
Series A Common share on As-converted Base 10,000,000
Series B Conversion Price $0.50
Series B Common share on As-converted Base 5,000,000
Total Fully Diluted Shares 55,000,000
Series B Post-money Valuation 27,500,000

Broad based weighted average

Common share 40,000,000
WP Series A Conversion Price $0.95
Series A Common share on As-converted Base 10,476,190
Series B Conversion Price $0.50
Series B Common share on As-converted Base 5,000,000
Total Fully Diluted Shares 55,476,190
Series B Post-money Valuation 27,738,095

Narrow based weighted average

Common share 40,000,000
WP Series A Conversion Price $0.83
Series A Common share on As-converted Base 12,000,000
Series B Conversion Price $0.50
Series B Common share on As-converted Base 5,000,000
Total Fully Diluted Shares 57,000,000
Series B Post-money Valuation 28,500,000

Full Ratchet anti-dilution

Common share 40,000,000
FP Series A Conversion Price $0.50
Series A Common share on As-converted Base 20,000,000
Series B Conversion Price $0.50
Series B Common share on As-converted Base 5,000,000
Total Fully Diluted Shares 65,000,000
 Series B Post-money Valuation 32,500,000

Loss of value between Series A and Series B

Non
anti-dilution
Series A post-money valuation 50,000,000
Series B pre-money valuation 25,000,000
Loss in value -25,000,000

Series B post-money valuation 27,500,000

Founder's value after Series B 20,000,000
Series A investor's value after Series B 5,000,000

Shared between:
Founder's value lost -20,000,000
% 80.00%
Series A investor's value lost -5,000,000
% 20.00%
% Ownership

80.00%

20.00%
100.00%

72.73%

18.18%

9.09%
100.00%

72.10%
OP ∗ ( FS + AS ) + BI
WP =
18.88% FS + AS + BS

9.01%
100.00%

70.18%
AI + BI
WP =
21.05% AS + BS

8.77%
100.00%

61.54%

30.77%

7.69%
100.00%
 Weighted Average Full Ratchet
Broad based Narrow based anti-dilution
50,000,000 50,000,000 50,000,000
25,238,095 26,000,000 30,000,000
-24,761,905 -24,000,000 -20,000,000

27,738,095 28,500,000 32,500,000

20,000,000 20,000,000 20,000,000
5,238,095 6,000,000 10,000,000

-20,000,000 -20,000,000 -20,000,000

80.77% 83.33% 100.00%
-4,761,905 -4,000,000 0
19.23% 16.67% 0.00%
 Calculation Details
Assumptions
FS Founder's Common share 8,000,000
AI Series A Investment $2,000,000
Series A Preferred share % 20.00%
BI Series B Investment $8,000,000
NV Series B Pre-money Valuation $8,000,000
Series A Post-money Valuation $10,000,000
OP Series A Preferred Purchase Price $1.00

% Ownership
Before Series B Financing
Founder's Share 8,000,000 80.00%
Series A Conversion Price $1.00
Series A Common share on As-converted Base 2,000,000 20.00%
Total Fully Diluted Shares 10,000,000 100.00%

Non anti-dilution
Common share 8,000,000 40.00%
Series A Conversion Price $1.00
Series A Common share on As-converted Base 2,000,000 10.00%
Total Fully Diluted Shares Before Series B 10,000,000
Series B Pre-money Valuation $8,000,000
Series B Investment $8,000,000
Series B shares 10,000,000 50.00%
NP Series B Purchase Price $0.80
Total Fully Diluted Shares 20,000,000 100.00%

Broad based weighted average AI

OP ∗ ( FS +
) + BI
Common share 8,000,000 39.02% OP OP ∗ NP ∗ (OP ∗ FS + AI + BI )
WP = =
WP Series A Conversion Price $0.8889 AI BI OP ∗ NP ∗ FS + AI ∗ NP + BI ∗ OP
FS + +
Series A Common share on As-converted Base 2,250,000 10.98% OP NP
Total Fully Diluted Shares Before Series B 10,250,000 NV + BI NV + BI
NP = =
Series B Pre-money Valuation $8,000,000 AI BI AI BI
FS + + FS + +
Series B Investment $8,000,000 WP NP OP ∗ NP ∗ (OP ∗ FS + AI + BI ) NP
Series B shares 10,250,000 50.00% OP ∗ NP ∗ FS + AI ∗ NP + BI ∗ OP
NP Series B Purchase Price $0.7805 NV ∗ OP ∗ (OP ∗ FS + AI + BI ) − AI ∗ BI ∗ OP
Total Fully Diluted Shares 20,500,000 100.00% ⇒ BPBW = FS ∗ OP ∗ (OP ∗ FS + AI + BI ) + AI ∗ OP ∗ FS + AI 2

Narrow based weighted average AI

38.10% OP ∗+ BI
Common share 8,000,000 OP OP ∗ NP ∗ ( AI + BI )
WP = =
WP Series A Conversion Price $0.8000 AI BI AI ∗ NP + BI ∗ OP
+
Series A Common share on As-converted Base 2,500,000 11.90% OP NP
Total Fully Diluted Shares Before Series B 10,500,000 NV + BI NV + BI
Series B Pre-money Valuation $8,000,000 NP = =
AI BI AI BI
Series B Investment $8,000,000 FS + + FS + +
WP NP OP ∗ NP ∗ ( AI + BI ) NP
Series B shares 10,500,000 50.00% AI ∗ NP + BI ∗ OP
NP Series B Purchase Price $0.7619 NV ∗ OP ∗ ( AI + BI ) − AI ∗ BI ∗ OP
Total Fully Diluted Shares 21,000,000 100.00% ⇒ BP NW = FS ∗ OP ∗ ( AI + BI ) + AI 2

Full Ratchet anti-dilution FP = NP

Common share 8,000,000 37.50%
NV + BI NP ∗ ( NV + BI )
FP Series A Conversion Price $0.75 ∴ NP = =
AI BI FS ∗ NP + AI + BI
Series A Common share on As-converted Base 2,666,667 12.50% FS + +
Total Fully Diluted Shares Before Series B 10,666,667 NP NP
Series B Pre-money Valuation $8,000,000 ⇒ NV + BI = FS ∗ NP + AI + BI
Series B Investment $8,000,000 NV − AI
⇒ FP = NPFull =
Series B shares 10,666,667 50.00% FS
NP Series B Purchase Price $0.75
Total Fully Diluted Shares 21,333,333 100.00%

Loss of value between Series A and Series B

Weighted Average Full Ratchet
Non
anti-
anti-dilution Broad based Narrow based
dilution
Series A post-money valuation 10,000,000 10,000,000 10,000,000 10,000,000
Series B pre-money valuation 8,000,000 8,000,000 8,000,000 8,000,000
Loss in value -2,000,000 -2,000,000 -2,000,000 -2,000,000

Series B post-money valuation 16,000,000 16,000,000 16,000,000 16,000,000

Founder's value after Series B 6,400,000 6,243,902 6,095,238 6,000,000
Series A investor's value after Series B 1,600,000 1,756,098 1,904,762 2,000,000

Shared between:
Founder's value lost -1,600,000 -1,756,098 -1,904,762 -2,000,000
% 80.00% 87.80% 95.24% 100.00%
Series A investor's value lost -400,000 -243,902 -95,238 0
% 20.00% 12.20% 4.76% 0.00%