1 00:00:01,160 --> 00:00:03,680 Speaker 1: The lecture year about to here comes from afro Tech 2 00:00:04,120 --> 00:00:09,280 Speaker 1: seventeen which was held in San Francisco, California. Marlon Nichols, 3 00:00:09,320 --> 00:00:12,039 Speaker 1: a VC with MAC venture capitalists on the main stage, 4 00:00:12,039 --> 00:00:15,680 Speaker 1: helping us understand start of funding rounds and the impact 5 00:00:15,760 --> 00:00:18,759 Speaker 1: on the CAB table, which is a spreadsheet or table 6 00:00:19,079 --> 00:00:23,680 Speaker 1: that shows the equity capitalization for a company. Cap tables 7 00:00:23,680 --> 00:00:26,360 Speaker 1: include all the equity in the company like common and 8 00:00:26,480 --> 00:00:30,400 Speaker 1: preferred shares and more. It's s who owns what. Basically, 9 00:00:31,920 --> 00:00:34,519 Speaker 1: Marlon is the person to give this talk. He's a 10 00:00:34,600 --> 00:00:37,880 Speaker 1: C stage venture capitalists that invest in visionary founders, build 11 00:00:37,880 --> 00:00:40,479 Speaker 1: in the future that the world wants to see. Some 12 00:00:40,600 --> 00:00:43,840 Speaker 1: of his current in previous portfolio companies include Bravity which 13 00:00:43,880 --> 00:00:48,520 Speaker 1: ons afro Tech, gimblet Media Listener, Maven, Mango, dB, Play Versus, 14 00:00:48,520 --> 00:00:51,840 Speaker 1: and more. But I remember so much about this talk 15 00:00:51,880 --> 00:00:54,480 Speaker 1: from afro Tech seven team is how full of knowledge 16 00:00:54,480 --> 00:00:57,560 Speaker 1: it was things that were critical to the founders with 17 00:00:57,680 --> 00:01:00,920 Speaker 1: central outcome. Like in the music business, artists get so 18 00:01:01,000 --> 00:01:03,320 Speaker 1: excited about getting a record deal that they don't read 19 00:01:03,360 --> 00:01:07,479 Speaker 1: their contracts, therefore don't understand the economics of selling a record, 20 00:01:07,760 --> 00:01:12,000 Speaker 1: touring or merchandise. In the world of startups. Too many 21 00:01:12,040 --> 00:01:14,319 Speaker 1: founders get a big surprise when they go to sell 22 00:01:14,560 --> 00:01:16,200 Speaker 1: and find out they're not gonna get as much of 23 00:01:16,280 --> 00:01:19,360 Speaker 1: the pie, and say want to start because they're so diluted. 24 00:01:20,480 --> 00:01:24,680 Speaker 1: So founders listening, it's the holiday season and I'm preparing 25 00:01:24,720 --> 00:01:26,840 Speaker 1: some more fire interviews for you guys that bring in 26 00:01:26,840 --> 00:01:30,959 Speaker 1: the new year. But for now, enjoy this throwback. So 27 00:01:31,000 --> 00:01:37,600 Speaker 1: we're gonna get into into cap tables. So basically, uh, 28 00:01:37,920 --> 00:01:39,880 Speaker 1: where's our runner, I'm gonna I'm gonna start. I'll make 29 00:01:39,920 --> 00:01:43,039 Speaker 1: this real interactive, right all right? Cool? Who can tell 30 00:01:43,080 --> 00:01:49,920 Speaker 1: me what the cap table is? Anybody? Damn, it's on 31 00:01:49,960 --> 00:01:56,920 Speaker 1: the screen. Basically, it's your it's your it's your ledger, right, 32 00:01:56,960 --> 00:02:00,280 Speaker 1: it's your it's your record for ownership within your company. 33 00:02:00,440 --> 00:02:03,800 Speaker 1: And it covers two types of stock. Primarily there's common 34 00:02:03,840 --> 00:02:08,480 Speaker 1: stock and preferred stock. UM. Again, everyone knows what the 35 00:02:08,480 --> 00:02:14,560 Speaker 1: difference between those two are. Huh No, man, y'all do 36 00:02:14,560 --> 00:02:18,120 Speaker 1: your homework. I sent it out now. Um So, common 37 00:02:18,120 --> 00:02:21,959 Speaker 1: stock is generally what UM founders get, and preferred stock 38 00:02:22,080 --> 00:02:26,360 Speaker 1: is what investors purchase or um or trade, and the 39 00:02:26,360 --> 00:02:31,120 Speaker 1: differences that preferred stock gets get some more UM, I 40 00:02:31,160 --> 00:02:35,120 Speaker 1: guess privileges then common stock does. For instance, when you 41 00:02:35,200 --> 00:02:38,120 Speaker 1: when you start thinking about change of control UM or 42 00:02:38,240 --> 00:02:41,520 Speaker 1: wanting to raise more capital or anything like that, UM, 43 00:02:41,600 --> 00:02:44,720 Speaker 1: the preferred stock owners are gonna have to approve that 44 00:02:44,800 --> 00:02:47,520 Speaker 1: in order for it to get done. So I guess 45 00:02:47,520 --> 00:02:50,120 Speaker 1: the biggest the biggest thing you can take away from 46 00:02:50,400 --> 00:02:53,440 Speaker 1: from me today is that once you raise capital from 47 00:02:53,720 --> 00:02:56,600 Speaker 1: venture capitalists or any investors, you start to give up 48 00:02:56,639 --> 00:03:01,840 Speaker 1: some control of your company. Right, all right, so cool. 49 00:03:01,880 --> 00:03:05,399 Speaker 1: So what I did was put together this exercise, UM, 50 00:03:05,400 --> 00:03:09,840 Speaker 1: where we're gonna pretend that, UM, we're an entrepreneur and uh, 51 00:03:09,919 --> 00:03:12,960 Speaker 1: we're raising we're creating our company, and we're raising a 52 00:03:13,000 --> 00:03:15,920 Speaker 1: couple of rounds of funding, and the first round of 53 00:03:15,919 --> 00:03:19,040 Speaker 1: funding is going to be a convertible note. Um, does 54 00:03:19,040 --> 00:03:23,720 Speaker 1: anyone know what a convertible note is? We got one 55 00:03:23,840 --> 00:03:33,079 Speaker 1: right there? Essentially, I think, if if I haven't right, 56 00:03:33,120 --> 00:03:36,320 Speaker 1: it's a debt product that on your next round of 57 00:03:36,400 --> 00:03:39,840 Speaker 1: capital converts into equity at a discount for your investors. 58 00:03:40,240 --> 00:03:47,520 Speaker 1: That's perfect. And so the reason why UM, yeah, So 59 00:03:47,560 --> 00:03:51,680 Speaker 1: the reason why UM, a startup would raise a convertible 60 00:03:51,760 --> 00:03:53,840 Speaker 1: note as opposed to do on a price round or 61 00:03:53,840 --> 00:03:56,840 Speaker 1: a straight equity round. Initially, Um, there are there are 62 00:03:56,840 --> 00:03:59,280 Speaker 1: a few reasons, but the primary reason is you don't 63 00:03:59,320 --> 00:04:00,840 Speaker 1: want to you don't want to price it. So you 64 00:04:00,840 --> 00:04:02,640 Speaker 1: don't want to put a price tag on your company 65 00:04:02,720 --> 00:04:06,040 Speaker 1: before you started, because that that's gonna act as a 66 00:04:06,080 --> 00:04:09,480 Speaker 1: trigger for further pricing down down the road. So if 67 00:04:09,480 --> 00:04:12,160 Speaker 1: you're really if you're really early, and you don't want 68 00:04:12,200 --> 00:04:14,480 Speaker 1: to say, oh, my company is only worth you know, 69 00:04:14,880 --> 00:04:17,560 Speaker 1: two million dollars, you can do something that is a 70 00:04:17,600 --> 00:04:20,720 Speaker 1: convertible note. And um, you have this thing on it 71 00:04:20,839 --> 00:04:23,760 Speaker 1: called a cap. I'll talk about it in a little bit, 72 00:04:24,040 --> 00:04:27,839 Speaker 1: but um, that's uh implied valuation as opposed to a 73 00:04:27,880 --> 00:04:30,880 Speaker 1: hard valuation. So you're leaving the door open to be 74 00:04:30,920 --> 00:04:34,120 Speaker 1: able to either price your company up or down. Um 75 00:04:34,240 --> 00:04:42,080 Speaker 1: later on makes sense. Question right here, can you do 76 00:04:42,120 --> 00:04:44,400 Speaker 1: a convertible note if you have an LLC or is 77 00:04:44,440 --> 00:04:47,039 Speaker 1: that also somewhere what arry ship earlier where you have 78 00:04:47,080 --> 00:04:49,320 Speaker 1: to get a C corps if you're taking a lawyer 79 00:04:49,320 --> 00:04:56,560 Speaker 1: can answer that? Okay, Uh, the the answer The answer 80 00:04:56,640 --> 00:05:01,279 Speaker 1: is yes, Um, you can't. Actually, it can't convert into 81 00:05:01,320 --> 00:05:05,640 Speaker 1: equity until it's a corporation though. Yeah, And and if 82 00:05:05,680 --> 00:05:09,040 Speaker 1: the I'm not giving legal advice here. I'm not a 83 00:05:09,240 --> 00:05:12,240 Speaker 1: not a lawyer, but if you're gonna start a company 84 00:05:12,560 --> 00:05:16,080 Speaker 1: and you intend to take on capital, then you should 85 00:05:16,080 --> 00:05:20,520 Speaker 1: just start with a corporation, all right. So UM any 86 00:05:20,520 --> 00:05:25,440 Speaker 1: other questions before UM? What are your opinion? What is 87 00:05:25,480 --> 00:05:29,520 Speaker 1: your opinion on a safe versus a convertible note? As 88 00:05:29,560 --> 00:05:32,800 Speaker 1: an investor, I don't like safe, so UM if everybody 89 00:05:32,839 --> 00:05:36,640 Speaker 1: else as safe as a it's kind of a derivative 90 00:05:36,760 --> 00:05:40,360 Speaker 1: of a convertible note. UM. It was created by by 91 00:05:40,880 --> 00:05:43,360 Speaker 1: the folks at y Combinator, and it's meant to be 92 00:05:43,720 --> 00:05:47,920 Speaker 1: UM equally investor and and founder friendly. But really it's 93 00:05:48,080 --> 00:05:51,400 Speaker 1: it's founder friendly. UM. So there there there there's some 94 00:05:51,480 --> 00:05:54,840 Speaker 1: issues that I have with it. UM One, there's usually 95 00:05:54,880 --> 00:05:58,640 Speaker 1: not a maturity date on it, so this note can 96 00:05:58,720 --> 00:06:03,080 Speaker 1: just live in perpect you as an investor, I'm I'm investing. 97 00:06:03,080 --> 00:06:05,680 Speaker 1: I'm doing this note. I'm investing in your company because 98 00:06:05,720 --> 00:06:08,560 Speaker 1: I want that to turn into equity. There's also a 99 00:06:08,600 --> 00:06:13,480 Speaker 1: lot of times it's UM. It's very um coy about 100 00:06:13,560 --> 00:06:17,560 Speaker 1: what happens. UM once this think converts, do I convert 101 00:06:18,160 --> 00:06:22,239 Speaker 1: on par with whatever? Around UM whatever financing that's happening, 102 00:06:22,560 --> 00:06:24,840 Speaker 1: and my junior to that and my senior to it. 103 00:06:25,480 --> 00:06:28,360 Speaker 1: There's just a lot of issues, um for an investor. 104 00:06:28,760 --> 00:06:33,840 Speaker 1: So we've never done a straight um safe. We've always 105 00:06:33,880 --> 00:06:36,520 Speaker 1: made those changes to it, so might as well just 106 00:06:36,560 --> 00:06:39,280 Speaker 1: start with a convertible note. And I think, um, there's 107 00:06:39,320 --> 00:06:44,000 Speaker 1: been some some reports from founders where they're also finding 108 00:06:44,120 --> 00:06:47,440 Speaker 1: issues with the with the safe down the road. But 109 00:06:47,600 --> 00:06:49,680 Speaker 1: it was meant to be, um, you know it was. 110 00:06:49,720 --> 00:06:56,800 Speaker 1: It was a nice try, all right, yeah, M thank you. 111 00:06:58,240 --> 00:07:02,160 Speaker 1: Which side of the table usually sides, whether it's going 112 00:07:02,200 --> 00:07:05,479 Speaker 1: to be a valued round or a convertible note, It 113 00:07:05,560 --> 00:07:09,320 Speaker 1: depends really, Um. Most of the time it's the it's 114 00:07:09,360 --> 00:07:13,200 Speaker 1: the founder. Um. But I'll give you one. I'll give 115 00:07:13,200 --> 00:07:15,720 Speaker 1: you experience that I had where I had a founder 116 00:07:15,760 --> 00:07:19,080 Speaker 1: that was coming out of Y combinator. Um h Lee 117 00:07:19,120 --> 00:07:22,520 Speaker 1: Andrew had a hinge too, and he his intention was 118 00:07:22,560 --> 00:07:25,080 Speaker 1: to raise a note, um, but he had he had 119 00:07:25,080 --> 00:07:28,320 Speaker 1: done enough where it made sense to to to basically 120 00:07:28,320 --> 00:07:33,440 Speaker 1: price it. And UM. You know the thing that investors 121 00:07:33,480 --> 00:07:36,280 Speaker 1: think about when it's when you're doing a note is 122 00:07:37,600 --> 00:07:40,440 Speaker 1: there's some there's some there's some variables that you can't 123 00:07:40,440 --> 00:07:44,400 Speaker 1: control there, right, You can't control what the valuation of 124 00:07:44,440 --> 00:07:47,440 Speaker 1: the price round is going to be, so I prefer 125 00:07:47,960 --> 00:07:51,720 Speaker 1: to know what that is and set that if I can. UM. 126 00:07:51,760 --> 00:07:54,880 Speaker 1: But if again, like I said before, if a UM, 127 00:07:54,920 --> 00:07:57,720 Speaker 1: if an entrepreneur is really early and you know they're 128 00:07:57,800 --> 00:08:00,840 Speaker 1: the data is not there to properly said, then they 129 00:08:00,880 --> 00:08:03,240 Speaker 1: may prefer to go with go with a note. But 130 00:08:03,320 --> 00:08:06,680 Speaker 1: it's it's a conversation. Sometimes it depends on who has 131 00:08:06,680 --> 00:08:08,640 Speaker 1: the power. If it's a really hot start up and 132 00:08:08,640 --> 00:08:10,320 Speaker 1: this is what they want to do and you want 133 00:08:10,320 --> 00:08:14,600 Speaker 1: to end and that's what you're gonna do. All right, Okay, 134 00:08:14,640 --> 00:08:22,600 Speaker 1: so uh let's move in everybody who did their homework. Dah. Okay, 135 00:08:22,920 --> 00:08:27,360 Speaker 1: it's gonna be harder. Um, alright, So the first exercise, right, 136 00:08:27,400 --> 00:08:32,040 Speaker 1: so we're starting this company. Um, we have m there 137 00:08:32,080 --> 00:08:34,960 Speaker 1: we go. We have ten million authorized shares in the 138 00:08:35,000 --> 00:08:39,360 Speaker 1: company and two founders between the two of them are 139 00:08:39,400 --> 00:08:44,120 Speaker 1: taking of that. So they're taking two point five million 140 00:08:44,480 --> 00:08:48,400 Speaker 1: shares each, right, and um, this is their first round 141 00:08:48,520 --> 00:08:52,439 Speaker 1: round of investment. And again it's a note. Um, it's 142 00:08:52,440 --> 00:08:57,000 Speaker 1: a note. And uh they're taking in five k from 143 00:08:57,160 --> 00:09:02,240 Speaker 1: from dope VC. That's me right, Um, there's a there's 144 00:09:02,240 --> 00:09:04,360 Speaker 1: a cap on the note, which again is a is 145 00:09:04,400 --> 00:09:07,360 Speaker 1: an implied valuation. And so a little bit more about that. 146 00:09:07,400 --> 00:09:11,640 Speaker 1: What what what this means is when UM when either 147 00:09:11,720 --> 00:09:14,760 Speaker 1: when the note mature's right, so let's say we have 148 00:09:14,840 --> 00:09:17,520 Speaker 1: a we have a UM A twenty four month term 149 00:09:17,600 --> 00:09:21,960 Speaker 1: on this note, it then turns into equity at that point, 150 00:09:22,400 --> 00:09:27,640 Speaker 1: this UM, this five million cap becomes the valuation right now, 151 00:09:27,720 --> 00:09:30,920 Speaker 1: if there is a price round before that maturity date, 152 00:09:31,400 --> 00:09:35,559 Speaker 1: then the valuation is at whatever UM price is set 153 00:09:35,640 --> 00:09:38,760 Speaker 1: by that the investor that's leading that round, right. So 154 00:09:39,280 --> 00:09:42,640 Speaker 1: if ah, here's here's the upside or the good thing 155 00:09:42,640 --> 00:09:45,959 Speaker 1: about UM notes. Potentially good thing about notes for investors 156 00:09:46,040 --> 00:09:48,880 Speaker 1: is that if I have a five million cap and 157 00:09:49,120 --> 00:09:52,800 Speaker 1: the valuation is set at ten million, then I pay 158 00:09:53,000 --> 00:09:55,520 Speaker 1: as I pay a price of five million for those 159 00:09:55,520 --> 00:09:57,880 Speaker 1: shares as opposed to ten million. So I'm kind of winning, 160 00:09:58,360 --> 00:10:00,680 Speaker 1: right UM. But it's it's a pre visit I get 161 00:10:00,720 --> 00:10:04,040 Speaker 1: for for taking the risk early. UM. And then you 162 00:10:04,320 --> 00:10:06,000 Speaker 1: and then the other thing is the I'll get to 163 00:10:06,040 --> 00:10:07,680 Speaker 1: you a second. The other thing is, um, you have 164 00:10:07,720 --> 00:10:12,040 Speaker 1: a discount. So it's either or it's whichever is lower. 165 00:10:12,440 --> 00:10:14,360 Speaker 1: So if the you know, if it is a ten 166 00:10:14,360 --> 00:10:17,880 Speaker 1: million dollar valuation. That's set um, and it's it's you 167 00:10:17,920 --> 00:10:20,959 Speaker 1: know I have I can either choose between uh, taking 168 00:10:21,120 --> 00:10:24,760 Speaker 1: seventy five price at seven s that or I can 169 00:10:24,800 --> 00:10:30,240 Speaker 1: take the five million. Obviously five is lower than seven 170 00:10:30,280 --> 00:10:35,320 Speaker 1: point five, so I'm gonna take five, right, Um. And 171 00:10:35,360 --> 00:10:37,800 Speaker 1: then uh, there's it's a note, it's a it's a 172 00:10:37,920 --> 00:10:43,640 Speaker 1: debt instrument. So there's interest that's accumulated every year. Um. 173 00:10:43,679 --> 00:10:53,280 Speaker 1: You had a question right here. I'm sorry give him 174 00:10:53,320 --> 00:10:57,600 Speaker 1: my I was saying, initially, the value of your company 175 00:10:57,640 --> 00:11:01,200 Speaker 1: is based on what in the smith you've got, or 176 00:11:02,240 --> 00:11:04,480 Speaker 1: so how does that work? See your question is how 177 00:11:04,640 --> 00:11:09,640 Speaker 1: how is the valuation set? Right? Um? It's kind of ambiguous. Actually, 178 00:11:10,240 --> 00:11:13,680 Speaker 1: um it it can be. You know, an entrepreneur feels 179 00:11:13,679 --> 00:11:17,280 Speaker 1: that their their company is worth this amount um from 180 00:11:17,320 --> 00:11:21,520 Speaker 1: an investor's perspective, if they are tangible things like revenue, right, 181 00:11:21,800 --> 00:11:25,280 Speaker 1: I'll look at that um and then apply a multiple 182 00:11:25,320 --> 00:11:28,760 Speaker 1: towards that that revenue. So let's say other companies in 183 00:11:28,800 --> 00:11:32,040 Speaker 1: the space are let's call it trading at a four 184 00:11:32,080 --> 00:11:34,880 Speaker 1: rex multiple. I would apply that four rex to to 185 00:11:35,000 --> 00:11:38,040 Speaker 1: that revenue number, and that's how I get my my valuation. 186 00:11:38,320 --> 00:11:40,719 Speaker 1: But then there are other things you got to consider too, like, 187 00:11:40,960 --> 00:11:43,920 Speaker 1: you know, is this a return founder? UM? Has she 188 00:11:44,400 --> 00:11:46,520 Speaker 1: sold a company before for a lot of money? Has 189 00:11:46,520 --> 00:11:49,000 Speaker 1: she taken a company public before? Is it's the same team? 190 00:11:49,200 --> 00:11:51,000 Speaker 1: You give them some credit for that sort of valuation? 191 00:11:51,040 --> 00:11:53,840 Speaker 1: Starts to inch up? Right? Is it a UM? Is 192 00:11:53,880 --> 00:11:56,560 Speaker 1: it a really new and hot space? Is this deal 193 00:11:56,640 --> 00:12:00,400 Speaker 1: really competitive? Is UM? You know Ryan over k poor 194 00:12:00,480 --> 00:12:02,840 Speaker 1: capital trying to steal the deal from me and I 195 00:12:02,880 --> 00:12:06,679 Speaker 1: gotta and I gotta outpriced him or something like that, Right, So, UM, 196 00:12:06,920 --> 00:12:09,480 Speaker 1: A lot of things go into it, but generally try 197 00:12:09,520 --> 00:12:14,360 Speaker 1: to find markers and and uh industry markets to help 198 00:12:14,400 --> 00:12:19,680 Speaker 1: you figure it out. All right, So jumping into the model, 199 00:12:19,720 --> 00:12:22,080 Speaker 1: I mean, if you can do division, you can create 200 00:12:22,120 --> 00:12:25,000 Speaker 1: a cap table. Right. That's that. That's all it is. 201 00:12:25,400 --> 00:12:28,720 Speaker 1: So I'm just gonna try to walk you guys through this. 202 00:12:28,760 --> 00:12:32,240 Speaker 1: Hopefully it's not too clumsy. Right. So we said that 203 00:12:32,480 --> 00:12:35,920 Speaker 1: UM there were ten million authorized shares and the found 204 00:12:36,000 --> 00:12:39,400 Speaker 1: each of the founders, the founder one and founder too. 205 00:12:39,679 --> 00:12:59,000 Speaker 1: Can you see, Oh you guys gotta put that back up, Okay? UM? Sorry? 206 00:12:59,040 --> 00:13:03,600 Speaker 1: So founder one, Founder two UM both have two point 207 00:13:03,679 --> 00:13:08,960 Speaker 1: five million shares each, right, totally down here five million shares. 208 00:13:10,840 --> 00:13:14,680 Speaker 1: The valuation cap for the note was five million, So 209 00:13:14,760 --> 00:13:20,720 Speaker 1: that's that's here. The the importance of the valuation cap 210 00:13:20,880 --> 00:13:23,920 Speaker 1: is it determines what I'm going to pay per share 211 00:13:24,360 --> 00:13:29,920 Speaker 1: um of stock. Right. So for instance, so basically, and 212 00:13:29,920 --> 00:13:32,440 Speaker 1: what I'm gonna look at is the number of shares 213 00:13:32,480 --> 00:13:39,840 Speaker 1: that have been allocated, right, and I'm gonna divide that. Um, 214 00:13:39,880 --> 00:13:42,840 Speaker 1: I'm gonna divide the valuation by the number of shares 215 00:13:42,880 --> 00:13:44,560 Speaker 1: that have been allocated, and that's how I get my 216 00:13:44,840 --> 00:13:49,880 Speaker 1: price valuation per share, right, So it's just the vision. 217 00:13:50,040 --> 00:13:54,920 Speaker 1: So that's how I got to to one dollar here. Um, 218 00:13:54,960 --> 00:13:59,280 Speaker 1: Now that's just the So that's the the comment I 219 00:13:59,360 --> 00:14:02,960 Speaker 1: got in an investor actually two investors that put in 220 00:14:03,000 --> 00:14:11,320 Speaker 1: five each dope VC and investor one right, totaling one million. Right. 221 00:14:11,880 --> 00:14:16,880 Speaker 1: So so now there's been one million dollars invested into 222 00:14:16,960 --> 00:14:22,440 Speaker 1: the company in the form of a convertible note. And uh, 223 00:14:22,840 --> 00:14:25,640 Speaker 1: the only other thing on on this on this exercise 224 00:14:25,680 --> 00:14:29,440 Speaker 1: that um it's really important to point out is remember 225 00:14:29,520 --> 00:14:31,960 Speaker 1: we talked about the purpose of having a cap table 226 00:14:32,280 --> 00:14:35,240 Speaker 1: is to understand your ownership, Right, how much of my 227 00:14:35,440 --> 00:14:39,880 Speaker 1: company do I now own? So as the founders with 228 00:14:40,080 --> 00:14:44,240 Speaker 1: just that one million dollar investment combine, they own eighty 229 00:14:44,320 --> 00:14:47,720 Speaker 1: three three of the company, right, which is a great 230 00:14:47,720 --> 00:14:49,960 Speaker 1: place to um to be when you're when you're starting 231 00:14:50,000 --> 00:14:55,480 Speaker 1: a company. I think I have some trigger questions. Yeah, 232 00:14:55,480 --> 00:14:57,840 Speaker 1: so we talked about the cap in the discount. So 233 00:14:57,920 --> 00:15:03,240 Speaker 1: let's let's move forward to exercise two. Exercise two bills 234 00:15:03,280 --> 00:15:07,400 Speaker 1: on exercise one. So you know, a year has passed 235 00:15:07,960 --> 00:15:11,880 Speaker 1: and UM, my company has done well, and uh someone 236 00:15:12,000 --> 00:15:13,840 Speaker 1: or your company has done well. I'm the investor. Your 237 00:15:13,840 --> 00:15:17,360 Speaker 1: company has done well, and so you're raising another round 238 00:15:17,360 --> 00:15:20,680 Speaker 1: of funding to help you with growth. Right, So what's 239 00:15:20,720 --> 00:15:23,880 Speaker 1: gonna happen here? Your seed notes are going to convert. 240 00:15:24,400 --> 00:15:27,080 Speaker 1: They're gonna either convert at um the five million cap 241 00:15:27,520 --> 00:15:36,680 Speaker 1: or or of the of the valuation. The the the investor, 242 00:15:36,760 --> 00:15:39,680 Speaker 1: the new investor. They're gonna price this thing. So they're 243 00:15:39,720 --> 00:15:43,440 Speaker 1: gonna set a pre money valuation of thirteen million. Anybody 244 00:15:43,480 --> 00:15:59,920 Speaker 1: know the difference between the pre money and post money 245 00:16:00,280 --> 00:16:03,880 Speaker 1: pre money, Yeah, she she got it. Pre money is 246 00:16:04,120 --> 00:16:06,960 Speaker 1: um the price of the company or what the company 247 00:16:07,040 --> 00:16:09,960 Speaker 1: is valued at prior to the investment, and then the 248 00:16:10,040 --> 00:16:14,000 Speaker 1: post money is um. It's an addition of the valuation 249 00:16:14,040 --> 00:16:17,880 Speaker 1: of the pre and the dollars that came in UM 250 00:16:17,920 --> 00:16:21,680 Speaker 1: after right, and so when you're when you're talking about 251 00:16:22,520 --> 00:16:25,400 Speaker 1: before the round is done, you talk about valuation in 252 00:16:25,480 --> 00:16:27,800 Speaker 1: terms of pre money, and then once the round is 253 00:16:27,920 --> 00:16:30,960 Speaker 1: um has concluded, then you speak about it in terms 254 00:16:31,040 --> 00:16:45,960 Speaker 1: of post money. It's uh so there there, there wasn't right, 255 00:16:46,000 --> 00:16:49,000 Speaker 1: because it's not an equity round. It's basically debt. At 256 00:16:49,000 --> 00:16:52,400 Speaker 1: that point, the question was was the five million um 257 00:16:52,520 --> 00:16:56,560 Speaker 1: cat considered a post or or pre and it's um, 258 00:16:56,600 --> 00:16:59,800 Speaker 1: it's neither actually because it's a convertible note. It's a 259 00:17:00,160 --> 00:17:03,160 Speaker 1: instrument at that point, and while you're holding a note, 260 00:17:03,440 --> 00:17:06,359 Speaker 1: you're not actually holding equity and so there and so 261 00:17:06,440 --> 00:17:12,080 Speaker 1: there isn't a true valuation at that at that point, Yeah, 262 00:17:12,440 --> 00:17:15,160 Speaker 1: I already know the answer, but for some of them 263 00:17:16,200 --> 00:17:20,240 Speaker 1: entrepreneurs here, so what is a the average interest rate 264 00:17:20,359 --> 00:17:23,600 Speaker 1: when giving out a convertible note? Who sets that? The 265 00:17:23,680 --> 00:17:30,800 Speaker 1: investor or the founder of the company. Like everything involving 266 00:17:30,840 --> 00:17:34,800 Speaker 1: a deal is everything is negotiable, right, So UM and independents, 267 00:17:34,840 --> 00:17:37,199 Speaker 1: who has who has more power in the deal. But 268 00:17:37,400 --> 00:17:41,800 Speaker 1: typically you'll have a lawyer and that law firm would 269 00:17:41,800 --> 00:17:45,280 Speaker 1: have seen some number of deals similar to this, and 270 00:17:45,320 --> 00:17:48,479 Speaker 1: they'll SAYY, the the average or the or the median 271 00:17:49,000 --> 00:17:52,040 Speaker 1: interest rate is this, and so that's what they'll they'll say, 272 00:17:52,119 --> 00:17:55,040 Speaker 1: let's go with right. And as an investor, you know, 273 00:17:55,080 --> 00:17:57,440 Speaker 1: I'm thinking about it from a you know, a risk 274 00:17:57,480 --> 00:18:01,000 Speaker 1: reward standpoint, UM, and I may go up and I 275 00:18:01,040 --> 00:18:04,520 Speaker 1: may go down, and it's basically just another negotiation, another 276 00:18:04,600 --> 00:18:08,520 Speaker 1: level for lever for a negotiation. UM. Typically if you're 277 00:18:08,560 --> 00:18:11,680 Speaker 1: really bullish on the deal, the interest rate doesn't doesn't 278 00:18:11,720 --> 00:18:14,760 Speaker 1: matter so much to you, right, UM, there are other 279 00:18:14,760 --> 00:18:17,000 Speaker 1: factors that are that are more important. So if the 280 00:18:17,640 --> 00:18:20,119 Speaker 1: you know, if the entrepreneur wants to lower interest rate, 281 00:18:20,359 --> 00:18:23,520 Speaker 1: you're probably gonna do that, all right. And you know, 282 00:18:23,560 --> 00:18:26,959 Speaker 1: if if things go as they should, the UM, the 283 00:18:27,000 --> 00:18:29,560 Speaker 1: interest that you're gonna get over a year or a 284 00:18:29,560 --> 00:18:32,160 Speaker 1: two year period is not going to really be material 285 00:18:32,200 --> 00:18:39,000 Speaker 1: in terms of your your ownership. UM. So can you 286 00:18:39,000 --> 00:18:43,200 Speaker 1: hear me? Can you hear me? So? What has been 287 00:18:43,320 --> 00:18:48,520 Speaker 1: your experience with buy sell agreements and how do they 288 00:18:48,760 --> 00:18:52,360 Speaker 1: what role do they play in this discussion about ownership evaluation? 289 00:18:52,720 --> 00:18:55,120 Speaker 1: All right, we gotta read the questions in and keep 290 00:18:55,119 --> 00:18:58,360 Speaker 1: them about about UM, about this I can. I can 291 00:18:58,400 --> 00:19:02,760 Speaker 1: catch up with you about that afterwards. UM. Okay, So 292 00:19:03,320 --> 00:19:06,200 Speaker 1: it's a thirty million pre money UM. It's a two 293 00:19:06,200 --> 00:19:09,040 Speaker 1: million dollar round. There are two new investors UM. One 294 00:19:09,080 --> 00:19:10,640 Speaker 1: is going to invest a million, the other one's gonna 295 00:19:10,640 --> 00:19:14,280 Speaker 1: invest half a million. I'm going to follow on and 296 00:19:14,320 --> 00:19:17,480 Speaker 1: do UM do half a million in this round. And 297 00:19:17,720 --> 00:19:21,840 Speaker 1: we're gonna we're gonna ask for a twenty option pool 298 00:19:22,359 --> 00:19:25,679 Speaker 1: and we're gonna do it pre investment. So does anyone 299 00:19:25,720 --> 00:19:35,840 Speaker 1: know what an option pool is? Ahead? Yeah, So it's 300 00:19:35,920 --> 00:19:39,359 Speaker 1: a it's a percentage of the of the UM common 301 00:19:39,400 --> 00:19:43,199 Speaker 1: stock in the company that's that you're holding UM to 302 00:19:43,640 --> 00:19:47,280 Speaker 1: either reward employees for for doing well or use it 303 00:19:47,320 --> 00:19:50,000 Speaker 1: as a recruiting vehicle to hire. I don't know your 304 00:19:50,040 --> 00:19:54,040 Speaker 1: CTO right because one of the one of the carrots 305 00:19:54,240 --> 00:19:57,919 Speaker 1: or the main things about the main attractive things about 306 00:19:58,080 --> 00:20:00,800 Speaker 1: UM joining a startup is a fact that it's you know, 307 00:20:00,840 --> 00:20:03,760 Speaker 1: it's gonna grow and you'll have ownership within that startup. 308 00:20:04,040 --> 00:20:07,840 Speaker 1: So this option pool UM allows you to to basically 309 00:20:08,000 --> 00:20:12,800 Speaker 1: award and UM reward your employees and soon to be 310 00:20:12,840 --> 00:20:16,320 Speaker 1: employees with stock in the company UM. And so at 311 00:20:16,359 --> 00:20:20,400 Speaker 1: the at the early stages. At the early stages, Um, 312 00:20:20,520 --> 00:20:24,399 Speaker 1: you want a pretty hefty um option pool so that 313 00:20:24,440 --> 00:20:26,679 Speaker 1: you don't have to to kind of create an option 314 00:20:26,720 --> 00:20:29,919 Speaker 1: pool again and again and again, because as you create, 315 00:20:30,040 --> 00:20:33,360 Speaker 1: as you increase that option pool, you you become deluded. 316 00:20:33,520 --> 00:20:37,880 Speaker 1: Right because remember it's price over um over shares, right, 317 00:20:37,920 --> 00:20:42,639 Speaker 1: So once you start adding more shares, you lose, you 318 00:20:42,720 --> 00:20:51,000 Speaker 1: lose ownership. I'm sorry back there, So you actually just 319 00:20:51,119 --> 00:20:54,440 Speaker 1: mentioned the word delution. How do you think through from 320 00:20:54,440 --> 00:20:57,879 Speaker 1: a term sheet perspective? Uh, you know sort of who 321 00:20:57,960 --> 00:21:01,040 Speaker 1: gets deluded? When you know? Is it founders? Is it 322 00:21:01,160 --> 00:21:04,760 Speaker 1: subsequent investors? How do you how do you think through that? Yeah? 323 00:21:04,840 --> 00:21:07,160 Speaker 1: So one of the things, one of the key things 324 00:21:07,200 --> 00:21:12,040 Speaker 1: here is this pre pre investment, right, So I want 325 00:21:12,040 --> 00:21:14,760 Speaker 1: that option pool to be created before I put my 326 00:21:14,840 --> 00:21:17,479 Speaker 1: money into this round. And the reason I'm doing that 327 00:21:17,640 --> 00:21:20,679 Speaker 1: is because once that option pool is created, at whatever 328 00:21:20,720 --> 00:21:23,320 Speaker 1: time that option pool is created, whoever owns stock in 329 00:21:23,359 --> 00:21:27,159 Speaker 1: that company, they're going to own less, right. So I 330 00:21:27,200 --> 00:21:31,640 Speaker 1: want that to happen before I invest, and entrepreneurs might 331 00:21:31,680 --> 00:21:35,040 Speaker 1: want that to happen after I invest. So again it's 332 00:21:35,080 --> 00:21:40,439 Speaker 1: another it's another point where we start to negotiate. She 333 00:21:40,480 --> 00:21:46,240 Speaker 1: had a question here he's bringing mic being sorry the 334 00:21:46,280 --> 00:21:48,399 Speaker 1: option pool being hefty? What do you mean by that 335 00:21:48,560 --> 00:21:53,000 Speaker 1: with like a T or like what is oh it? 336 00:21:53,320 --> 00:21:56,840 Speaker 1: It's it's gonna vary. I think UM anywhere from ten 337 00:21:57,000 --> 00:22:01,920 Speaker 1: to For a really early company, it's fair. Um. Most 338 00:22:01,960 --> 00:22:04,680 Speaker 1: of the times you'll probably get to fifteen or or 339 00:22:04,880 --> 00:22:08,040 Speaker 1: or ten percent at at this stage. Series A companies 340 00:22:08,560 --> 00:22:11,680 Speaker 1: UM probably have an option pool around ten percent because 341 00:22:11,720 --> 00:22:15,760 Speaker 1: at a Series A you probably have your most of 342 00:22:15,800 --> 00:22:18,080 Speaker 1: your key executives in place, which are the ones that 343 00:22:18,119 --> 00:22:21,960 Speaker 1: are gonna be awarded most of that option pool. UM. 344 00:22:22,080 --> 00:22:24,080 Speaker 1: So you know, you can have a little bit a 345 00:22:24,119 --> 00:22:26,520 Speaker 1: little bit less. But in this case we're asking for 346 00:22:26,960 --> 00:22:33,280 Speaker 1: for twenty and so in this spreadsheet, basically what we're 347 00:22:33,359 --> 00:22:35,680 Speaker 1: what we're doing is we need to say, all, right, 348 00:22:35,800 --> 00:22:40,200 Speaker 1: of that of those ten million authorized shares that we 349 00:22:40,440 --> 00:22:45,920 Speaker 1: UM that we have, we need that to be in 350 00:22:46,040 --> 00:22:50,199 Speaker 1: the option pool. So for those of you spreadsheet jockeys 351 00:22:50,240 --> 00:22:54,399 Speaker 1: out there, basically just run a goal seek um and 352 00:22:54,720 --> 00:22:57,240 Speaker 1: uh you know so that you set this cell here 353 00:22:57,400 --> 00:23:02,320 Speaker 1: to to equal um basically by changing the number here, right, 354 00:23:02,760 --> 00:23:07,800 Speaker 1: So what happens is this number UM gets bigger and 355 00:23:07,920 --> 00:23:11,160 Speaker 1: you can see that my price per share gets smaller. 356 00:23:12,040 --> 00:23:14,199 Speaker 1: So that's the that's what that's what we mean by 357 00:23:14,400 --> 00:23:19,040 Speaker 1: by delution. Now in this UM series A. Right, so 358 00:23:19,359 --> 00:23:22,760 Speaker 1: we're putting in half a million. These two UM investors 359 00:23:22,800 --> 00:23:25,480 Speaker 1: are putting in one point five million total, which is 360 00:23:25,520 --> 00:23:29,399 Speaker 1: a two million. The pre money valuation is thirteen million, 361 00:23:30,160 --> 00:23:34,200 Speaker 1: and the price per share is basically calculated by the 362 00:23:34,320 --> 00:23:38,000 Speaker 1: pre money valuation divided by the sum of the common 363 00:23:38,119 --> 00:23:43,399 Speaker 1: stock plus the stock that was purchased in that note 364 00:23:43,800 --> 00:23:52,600 Speaker 1: that's now converting into the equity. Everybody got that, all right? 365 00:23:53,040 --> 00:23:55,120 Speaker 1: Now you can ask questions if you don't, but I'm 366 00:23:55,119 --> 00:24:00,800 Speaker 1: assuming you got it. Sure, I'll repeat it. So the 367 00:24:01,880 --> 00:24:06,560 Speaker 1: the price per share is calculated by taking the value 368 00:24:06,600 --> 00:24:09,399 Speaker 1: the pre money valuation, which we said at thirteen million, 369 00:24:10,320 --> 00:24:13,760 Speaker 1: and we're gonna divide that by the sum of the 370 00:24:14,160 --> 00:24:17,200 Speaker 1: total stock that has been issued in the company. Right, 371 00:24:17,280 --> 00:24:22,159 Speaker 1: So um, the common stock plus the stock that was 372 00:24:22,280 --> 00:24:25,280 Speaker 1: purchased as a part of the convertible note, because remember 373 00:24:25,320 --> 00:24:28,800 Speaker 1: the convertible note is converting into equity at the first 374 00:24:28,840 --> 00:24:34,200 Speaker 1: price round and that's where we are right now, I 375 00:24:34,280 --> 00:24:38,680 Speaker 1: got it already, A right? Cool? Um? All right? So 376 00:24:39,560 --> 00:24:43,919 Speaker 1: now now we actually have preferred stock in the company. 377 00:24:44,000 --> 00:24:45,760 Speaker 1: I'll get you in a second. Now we actually have 378 00:24:45,840 --> 00:24:48,760 Speaker 1: preferred stock in the company, right, because we're investing in 379 00:24:48,840 --> 00:24:53,080 Speaker 1: a price round series A. So now I have you 380 00:24:53,160 --> 00:24:57,040 Speaker 1: know I had before, I only had fully fully deluded ownership. 381 00:24:57,240 --> 00:25:00,919 Speaker 1: Right now I have preferred ownership and I have UM 382 00:25:01,240 --> 00:25:07,560 Speaker 1: total ownership. Anyone knows why this is important? Bode care 383 00:25:09,960 --> 00:25:12,439 Speaker 1: it comes It all comes back to control. It all 384 00:25:12,480 --> 00:25:15,119 Speaker 1: comes back to control. Right. So remember I said the 385 00:25:15,160 --> 00:25:19,119 Speaker 1: difference between common stock and preferred stock is that preferred 386 00:25:19,160 --> 00:25:23,160 Speaker 1: stock has more privileges, right and UM and they get 387 00:25:23,200 --> 00:25:26,240 Speaker 1: to make certain decisions. Right. Can you sell your company 388 00:25:26,320 --> 00:25:28,159 Speaker 1: for a dollar? If I'm an investor and I and 389 00:25:28,280 --> 00:25:31,600 Speaker 1: I bought in for two dollars, I'm gonna say no, right, 390 00:25:31,880 --> 00:25:34,200 Speaker 1: and the other investors are gonna say that too. There's 391 00:25:34,240 --> 00:25:38,640 Speaker 1: a concept of UM voting thresholds for for the preferred 392 00:25:39,359 --> 00:25:43,720 Speaker 1: UM stock stockholders, right, so I could say maybe it's majority. 393 00:25:44,200 --> 00:25:48,359 Speaker 1: So if we want a decision to go forward of 394 00:25:48,480 --> 00:25:52,280 Speaker 1: the preferred or fifty point one or fifty point zero 395 00:25:52,359 --> 00:25:55,200 Speaker 1: zero zero zero zero zero one percent of the preferred 396 00:25:55,680 --> 00:25:59,080 Speaker 1: need to agree to move forward UM with whatever that 397 00:25:59,200 --> 00:26:03,840 Speaker 1: measure is. So as you're thinking about your investors and 398 00:26:03,920 --> 00:26:08,320 Speaker 1: who you're taking money from. This becomes really important because 399 00:26:08,359 --> 00:26:11,800 Speaker 1: there're gonna be some investors that you you really align with, 400 00:26:12,119 --> 00:26:14,320 Speaker 1: that you think are are really good for your company, 401 00:26:14,960 --> 00:26:18,800 Speaker 1: and they're gonna be other investors that you're like, right, 402 00:26:18,960 --> 00:26:21,800 Speaker 1: it's they're okay, but um, but we need the money, 403 00:26:21,840 --> 00:26:23,720 Speaker 1: so we let them in. And you just want to 404 00:26:23,800 --> 00:26:28,040 Speaker 1: make sure that no one investor can make decisions about 405 00:26:28,119 --> 00:26:33,399 Speaker 1: your company all by themselves, right. So in this case, 406 00:26:34,600 --> 00:26:39,679 Speaker 1: the VC almost thirty eight of the preferred ownership right, 407 00:26:40,240 --> 00:26:43,240 Speaker 1: which means that I would then need you know, I 408 00:26:43,280 --> 00:26:58,800 Speaker 1: would need Let's see, so I would need it. In 409 00:26:59,160 --> 00:27:01,239 Speaker 1: most cases, I would lead to need at least two 410 00:27:01,280 --> 00:27:03,920 Speaker 1: investors to agree with me or at least one other 411 00:27:04,080 --> 00:27:06,960 Speaker 1: investor to agree with me in order to move that 412 00:27:07,080 --> 00:27:10,840 Speaker 1: measure forward. And as a as an entrepreneur, that's something 413 00:27:10,920 --> 00:27:13,560 Speaker 1: that you that you want to make sure. Now you 414 00:27:13,720 --> 00:27:18,159 Speaker 1: note that none of the founder the founders don't have 415 00:27:18,240 --> 00:27:21,520 Speaker 1: any preferred stock right, And again that's because founders get 416 00:27:21,600 --> 00:27:25,200 Speaker 1: common stock and investors get preferred stock. But what's still 417 00:27:25,320 --> 00:27:28,640 Speaker 1: important here, it's how much of the company the founders 418 00:27:28,920 --> 00:27:32,600 Speaker 1: founders owned. They got deluded now now they own combine 419 00:27:32,720 --> 00:27:36,520 Speaker 1: fifty four of the company. So something else you've got 420 00:27:36,600 --> 00:27:38,920 Speaker 1: to think about as you move closer and closer to 421 00:27:39,600 --> 00:27:42,200 Speaker 1: exiting this company. Right, and you've got to think about 422 00:27:42,240 --> 00:27:44,399 Speaker 1: how much you're doing this for a reason? Right, You're 423 00:27:44,440 --> 00:27:46,719 Speaker 1: doing this because at the end of the day, I mean, 424 00:27:47,320 --> 00:27:50,120 Speaker 1: you may be doing this too for a social good, 425 00:27:50,200 --> 00:27:52,280 Speaker 1: which is great. But at the end of the day, 426 00:27:52,840 --> 00:27:56,320 Speaker 1: I think, I think we build companies to to generate wealth, 427 00:27:56,680 --> 00:28:00,400 Speaker 1: and so your ownership is really important and unders standing 428 00:28:00,720 --> 00:28:02,200 Speaker 1: you know, what you could get at the end of 429 00:28:02,240 --> 00:28:05,440 Speaker 1: the road is really really important. You have a question, 430 00:28:07,880 --> 00:28:11,480 Speaker 1: can you can you talk a little bit about the 431 00:28:11,640 --> 00:28:16,440 Speaker 1: impact of forfeitures or the explorations of option agreements to 432 00:28:16,560 --> 00:28:20,000 Speaker 1: your cap table, you know how forfeit amounts are redistributed. 433 00:28:21,960 --> 00:28:25,400 Speaker 1: That's a little beyond the scope of this exercise, UM, 434 00:28:25,680 --> 00:28:28,280 Speaker 1: but I can talk to you about it offline afterwards. 435 00:28:29,280 --> 00:28:32,960 Speaker 1: I feel like we'll get everybody lost. I missed how 436 00:28:33,440 --> 00:28:39,440 Speaker 1: the note shares convert, like the actual five three five 437 00:28:39,480 --> 00:28:44,720 Speaker 1: converts into seven shares. But general answer to your question, UM, 438 00:28:45,360 --> 00:28:50,800 Speaker 1: if let's say, let's say, UM, you awarded some number 439 00:28:50,840 --> 00:28:54,560 Speaker 1: of shares to an employee and they have a vesting period. 440 00:28:55,000 --> 00:28:57,480 Speaker 1: So that's another concept. So there's a vest investing period 441 00:28:57,560 --> 00:29:00,360 Speaker 1: just means that you don't get all that stock at once, right, 442 00:29:00,640 --> 00:29:04,360 Speaker 1: which is really really important because you want to incentivize 443 00:29:04,400 --> 00:29:06,840 Speaker 1: your employees to stay and do and do a good 444 00:29:06,960 --> 00:29:09,640 Speaker 1: job over a period of times, usually a four year period. 445 00:29:10,240 --> 00:29:13,440 Speaker 1: So let's say this employee leaves at the two year mark, 446 00:29:13,840 --> 00:29:17,960 Speaker 1: so of UM, you know, of the stock that they've 447 00:29:18,040 --> 00:29:21,640 Speaker 1: been awarded essentially would have bested, so they owned that 448 00:29:22,120 --> 00:29:24,200 Speaker 1: there were the other fifty percent would go back into 449 00:29:24,240 --> 00:29:27,520 Speaker 1: the pool, which is the gist of your question. But 450 00:29:27,840 --> 00:29:29,080 Speaker 1: I know you want to get deeper, so we can 451 00:29:29,120 --> 00:29:34,600 Speaker 1: talk about later. And I'm sorry. Oh right, So the 452 00:29:35,560 --> 00:29:39,120 Speaker 1: the note and how it how it converted Basically, I'll 453 00:29:39,200 --> 00:29:42,840 Speaker 1: let you see the formula. So remember we had a 454 00:29:42,920 --> 00:29:45,320 Speaker 1: seven percent We had seven percent interest on a note, right, 455 00:29:45,640 --> 00:29:48,640 Speaker 1: so based and it's a year later, so um our 456 00:29:48,680 --> 00:29:52,480 Speaker 1: initial investment amount which was UM half a million, just 457 00:29:52,680 --> 00:29:57,160 Speaker 1: multiplying that by one point zero seven and that turns 458 00:29:57,200 --> 00:30:01,480 Speaker 1: into uh, you know this many shares. And and again 459 00:30:01,560 --> 00:30:04,360 Speaker 1: the way that we're calculating those shares is we're taking 460 00:30:04,480 --> 00:30:06,800 Speaker 1: the We're either going to take the price for share 461 00:30:07,280 --> 00:30:09,200 Speaker 1: or the or the disc or the price for share 462 00:30:09,240 --> 00:30:12,760 Speaker 1: based on the discount, right, Um, which one of these 463 00:30:12,800 --> 00:30:17,200 Speaker 1: are we're gonna take as a investor the price of share, right, 464 00:30:17,200 --> 00:30:19,640 Speaker 1: because it's we're paying less for it. Um. And the 465 00:30:19,720 --> 00:30:25,440 Speaker 1: way that this is calculated is basically you're taking the 466 00:30:25,520 --> 00:30:28,120 Speaker 1: common stock, which is all that existed in the in 467 00:30:28,240 --> 00:30:31,760 Speaker 1: the company. Um, you know when when we put our 468 00:30:32,080 --> 00:30:34,920 Speaker 1: when we did the note, and UM, you're putting that 469 00:30:35,080 --> 00:30:40,760 Speaker 1: into the the the cap right, which was UM five millions, 470 00:30:41,960 --> 00:30:48,400 Speaker 1: got it? Okay, Yeah, I'm not sure if you're actually 471 00:30:48,480 --> 00:30:50,440 Speaker 1: gonna cover it in the next section, but can you 472 00:30:50,560 --> 00:30:54,520 Speaker 1: talk about the difference between cumulative preferred stock and non 473 00:30:54,600 --> 00:30:59,360 Speaker 1: cumulative preferred stock and how UM that basically breaks down 474 00:31:00,560 --> 00:31:03,080 Speaker 1: as far as like um, you know, invest their ownership 475 00:31:03,120 --> 00:31:07,360 Speaker 1: in which one they prefer. Yeah, we'll we'll get to it. 476 00:31:07,600 --> 00:31:17,560 Speaker 1: Um towards the tourds inn um. All right, So uh 477 00:31:17,920 --> 00:31:20,920 Speaker 1: three three in UM and four. I think we're running 478 00:31:20,920 --> 00:31:24,440 Speaker 1: short on time. So UM, I think right, UM, the 479 00:31:24,640 --> 00:31:27,080 Speaker 1: three and four will will trying to put together. UM. 480 00:31:27,840 --> 00:31:31,040 Speaker 1: So exercise three basically we're gonna do the next round 481 00:31:31,080 --> 00:31:33,880 Speaker 1: of funding. It's a year later, Series B twenty million, 482 00:31:34,280 --> 00:31:37,560 Speaker 1: pre money. That's the that's the evaluation UM's ten million 483 00:31:37,560 --> 00:31:40,840 Speaker 1: dollar round. You've got two new investors each putting in 484 00:31:40,960 --> 00:31:44,120 Speaker 1: five million two point um two point two million, and 485 00:31:44,200 --> 00:31:47,560 Speaker 1: then um, all of the Series A investors are doing 486 00:31:47,600 --> 00:31:54,360 Speaker 1: their parada um and for paradis means basically it's your 487 00:31:54,440 --> 00:31:57,280 Speaker 1: ownership in the company before this round, and you're just 488 00:31:57,360 --> 00:32:02,920 Speaker 1: basically multiplying that percentage. I can't hear you zoom in? 489 00:32:03,880 --> 00:32:11,120 Speaker 1: Can you zoom in? Oh zoom in? Oh h sure, 490 00:32:15,520 --> 00:32:23,040 Speaker 1: the help I can? UM? I forgot where it was? 491 00:32:24,040 --> 00:32:27,960 Speaker 1: Oh parata right, So basically you're multiplying your percentage ownership 492 00:32:28,320 --> 00:32:31,440 Speaker 1: by whatever however much is coming into the company. Right, 493 00:32:31,480 --> 00:32:34,280 Speaker 1: So if I own UM, well, i'll just show you 494 00:32:34,520 --> 00:32:41,320 Speaker 1: in the in the model. So here we go. So 495 00:32:41,480 --> 00:32:52,520 Speaker 1: Series B basically, UM, I can how's that all? Right? 496 00:32:53,120 --> 00:32:57,720 Speaker 1: So UM, basically my Series B amount, I'm going to 497 00:32:57,840 --> 00:33:02,160 Speaker 1: calculate it by taking my fully deluded ownership in the company, 498 00:33:02,680 --> 00:33:06,479 Speaker 1: UM times the amount that's being raised in the round. Right. 499 00:33:06,840 --> 00:33:09,520 Speaker 1: So one of the terms in in the term sheet 500 00:33:09,640 --> 00:33:13,720 Speaker 1: or in the UM the the investment documents is you 501 00:33:13,840 --> 00:33:17,200 Speaker 1: might have a right to invest at your pro rata, right, 502 00:33:17,680 --> 00:33:20,840 Speaker 1: So that that what that does is it makes sure 503 00:33:21,120 --> 00:33:24,280 Speaker 1: that I can maintain the same level of ownership in 504 00:33:24,360 --> 00:33:27,040 Speaker 1: the next round of funding, which as an investor is 505 00:33:27,080 --> 00:33:29,959 Speaker 1: really important to me because I don't I don't like delution, right, 506 00:33:30,040 --> 00:33:33,520 Speaker 1: and I'm thinking about the the carrot at the end 507 00:33:33,640 --> 00:33:35,840 Speaker 1: of the trail, right, how much am I going to 508 00:33:35,920 --> 00:33:37,920 Speaker 1: get out of this thing when it's all set and done? 509 00:33:41,880 --> 00:33:46,240 Speaker 1: All right, So all the other things are the same 510 00:33:46,320 --> 00:33:51,160 Speaker 1: mechanics as before. Let's let's talk about UM exits, right. 511 00:33:51,760 --> 00:33:58,200 Speaker 1: So at exit UM we're saying that the company is 512 00:33:58,240 --> 00:34:03,160 Speaker 1: now doing two million UM in revenue, and this is 513 00:34:03,240 --> 00:34:05,720 Speaker 1: two years after the Series B. The reason why the 514 00:34:05,840 --> 00:34:11,520 Speaker 1: time matters is because UM we inventure capital and investing UM. 515 00:34:12,239 --> 00:34:15,600 Speaker 1: The measure of UM of successes is I r R, 516 00:34:15,840 --> 00:34:18,640 Speaker 1: which is a time based metric. So it's not just 517 00:34:18,960 --> 00:34:21,720 Speaker 1: the dollar amount, but it's how quickly did I return 518 00:34:22,160 --> 00:34:25,279 Speaker 1: that dollar amount to to my investors. So the fact 519 00:34:25,360 --> 00:34:29,000 Speaker 1: that it's not UM one year later UM is is 520 00:34:29,080 --> 00:34:32,719 Speaker 1: really important. But so it's two years later UM after 521 00:34:32,800 --> 00:34:36,160 Speaker 1: the Series B. There were no investments after the Series B, 522 00:34:36,680 --> 00:34:40,399 Speaker 1: which is also really important. UM. The reason why that's 523 00:34:40,560 --> 00:34:43,080 Speaker 1: that's important is because if I did not participate I 524 00:34:43,080 --> 00:34:44,880 Speaker 1: did invest in the Series B, then there's going to 525 00:34:44,960 --> 00:34:48,080 Speaker 1: be some level of delution because there was no UM 526 00:34:48,280 --> 00:34:50,520 Speaker 1: round and I didn't. There was no round for me 527 00:34:50,560 --> 00:34:54,560 Speaker 1: to invest in. There's no delusion for me to worry about. Yeah, 528 00:34:55,360 --> 00:34:58,040 Speaker 1: for those pro rata rights, do you have to put 529 00:34:58,160 --> 00:35:01,399 Speaker 1: more money in as one of the original founders, um, 530 00:35:01,640 --> 00:35:04,240 Speaker 1: when the money is raised in the Series B founders 531 00:35:04,280 --> 00:35:08,239 Speaker 1: don't have progrado rights, not founders, I'm sorry, the original investors. Yeah, 532 00:35:08,280 --> 00:35:10,080 Speaker 1: So that that's that's what I was saying. If UM, 533 00:35:10,560 --> 00:35:13,000 Speaker 1: if you if you have that privilege, if you have 534 00:35:13,160 --> 00:35:15,640 Speaker 1: that right, then in order to maintain it, you have 535 00:35:15,840 --> 00:35:18,759 Speaker 1: to invest whatever that number is in this round. If 536 00:35:18,840 --> 00:35:26,040 Speaker 1: you don't, you lose it. Generally speaking, UM, five minutes okay, UM, 537 00:35:27,200 --> 00:35:30,600 Speaker 1: So just to wrap this up, and we're applying to 538 00:35:30,640 --> 00:35:34,720 Speaker 1: exit multiple of five. So exit multiple is basically created 539 00:35:34,760 --> 00:35:37,839 Speaker 1: in the same you get it basic basically looking at 540 00:35:37,960 --> 00:35:40,680 Speaker 1: public companies and other private companies in the space, and 541 00:35:40,880 --> 00:35:44,040 Speaker 1: you and you determine, UM, whatever that is. Maybe take 542 00:35:44,080 --> 00:35:46,960 Speaker 1: the median of a bunch of public companies of their UM, 543 00:35:47,440 --> 00:35:50,960 Speaker 1: their trailing trailing twelve month revenue, and you and you 544 00:35:51,040 --> 00:35:55,280 Speaker 1: apply it. UM. So what we did here really quickly, 545 00:35:55,840 --> 00:35:59,680 Speaker 1: uh two million UM revenue in revenue at the time, 546 00:36:00,239 --> 00:36:04,040 Speaker 1: and it's an exit multiple of five. So the exit 547 00:36:04,160 --> 00:36:09,960 Speaker 1: valuation is basically a billion. And then um our our 548 00:36:10,080 --> 00:36:13,640 Speaker 1: take of that is whatever our fully deluded ownership was 549 00:36:13,719 --> 00:36:17,240 Speaker 1: at that time times that billion, which gives us basically 550 00:36:17,239 --> 00:36:22,360 Speaker 1: a hundred and nine million. And then to calculate I 551 00:36:22,560 --> 00:36:24,480 Speaker 1: R R you can create it to you guys have 552 00:36:24,640 --> 00:36:28,000 Speaker 1: the table, but um, you basically create a table similar 553 00:36:28,000 --> 00:36:31,960 Speaker 1: to this which basically here captures your your outflow. So 554 00:36:32,120 --> 00:36:36,160 Speaker 1: what I invested as negative numbers and then ultimately what 555 00:36:36,280 --> 00:36:38,880 Speaker 1: I'm going to get back. And the formula here is 556 00:36:38,920 --> 00:36:42,360 Speaker 1: basically just an X I R R on the on 557 00:36:42,480 --> 00:36:45,480 Speaker 1: the eggs, the the the exit number, and and that's 558 00:36:45,520 --> 00:36:47,719 Speaker 1: how you get to the to the end. Only other 559 00:36:47,840 --> 00:36:52,080 Speaker 1: thing that um, you guys should I want to consider 560 00:36:52,160 --> 00:36:55,960 Speaker 1: here is a concept of liquidation preference, UM. And so 561 00:36:56,239 --> 00:37:00,640 Speaker 1: liquidation preference comes into account at the at the at 562 00:37:00,680 --> 00:37:04,080 Speaker 1: the very end, right, the standard these days is one 563 00:37:04,239 --> 00:37:08,520 Speaker 1: x liquidation preference. So what that means is, UM, Remember 564 00:37:08,640 --> 00:37:11,720 Speaker 1: I said that preferred has certain privileges that common doesn't. 565 00:37:12,000 --> 00:37:15,360 Speaker 1: One of those privileges is that we get paid before you, 566 00:37:15,520 --> 00:37:18,200 Speaker 1: the entrepreneur that's doing all the work, gets paid because 567 00:37:18,239 --> 00:37:22,160 Speaker 1: we put up the money. It's fair UM. And so 568 00:37:22,520 --> 00:37:25,120 Speaker 1: one x means that as soon as we um we 569 00:37:25,239 --> 00:37:28,680 Speaker 1: get our ownership, whatever our ownership, whatever our percentage is 570 00:37:29,120 --> 00:37:33,719 Speaker 1: of that return, then the common holders start to get 571 00:37:33,840 --> 00:37:37,200 Speaker 1: their returns right now. If you do something like a 572 00:37:37,280 --> 00:37:41,800 Speaker 1: too x liquidation UM preference, now you're getting into a 573 00:37:41,880 --> 00:37:44,759 Speaker 1: place where the investors UH is getting a little bit 574 00:37:44,840 --> 00:37:48,359 Speaker 1: more than UM, maybe what some say, maybe more than 575 00:37:48,400 --> 00:37:50,560 Speaker 1: what they deserve, but it depends on the situation when 576 00:37:50,600 --> 00:37:53,680 Speaker 1: the deal was done. So now once we get to 577 00:37:53,760 --> 00:37:58,759 Speaker 1: one x, right now everyone starts participating and including us. 578 00:37:59,200 --> 00:38:02,960 Speaker 1: So we're continuing to so right alongside you, I'm taking 579 00:38:03,239 --> 00:38:06,239 Speaker 1: I'm taking more cash and more cash in until I 580 00:38:06,320 --> 00:38:10,360 Speaker 1: get to two times my my UM my ownership in 581 00:38:10,440 --> 00:38:14,520 Speaker 1: the company. So pretty A lot of people think this 582 00:38:14,719 --> 00:38:18,800 Speaker 1: is unfair to entrepreneurs, a little um founder unfriendly. So 583 00:38:19,239 --> 00:38:22,520 Speaker 1: typically it's one x UM, but really important for you 584 00:38:22,760 --> 00:38:25,040 Speaker 1: for you to note in something critical for you to 585 00:38:25,080 --> 00:38:29,320 Speaker 1: think about as you're thinking through and negotiating terms. And 586 00:38:29,440 --> 00:38:31,800 Speaker 1: I think we are out of time, but i'd probably 587 00:38:31,840 --> 00:38:35,520 Speaker 1: take one question, one or two questions gentlemen. A gentleman 588 00:38:35,560 --> 00:38:39,120 Speaker 1: behind me wanted to know if the slides were available somewhere, 589 00:38:39,560 --> 00:38:43,160 Speaker 1: or do you have a course you teach. Yes, so 590 00:38:43,800 --> 00:38:46,080 Speaker 1: in the number in in a few places so UM 591 00:38:46,280 --> 00:38:52,239 Speaker 1: hbc uvc UM they they it's one of our interns. 592 00:38:52,920 --> 00:38:57,120 Speaker 1: UM they have an online course and UH I provided 593 00:38:57,600 --> 00:38:59,160 Speaker 1: some of the content for that, so you can find 594 00:38:59,200 --> 00:39:04,400 Speaker 1: it there. Also the specific UM specific PowerPoint presentation and 595 00:39:04,640 --> 00:39:07,520 Speaker 1: the Excel document I think had been sent to everyone 596 00:39:08,160 --> 00:39:11,640 Speaker 1: UM through through BT and afro tech. They didn't send 597 00:39:11,640 --> 00:39:13,400 Speaker 1: along with the answers, but I'm sure they'll they'll do 598 00:39:13,520 --> 00:39:36,359 Speaker 1: that right after the session, all right, thank you. Black 599 00:39:36,440 --> 00:39:38,959 Speaker 1: Tag Green Money is a production of Blavity afro Tech 600 00:39:39,120 --> 00:39:41,760 Speaker 1: on the Black Effect podcast Network and i Heeart Media. 601 00:39:42,160 --> 00:39:45,400 Speaker 1: Is produced by Morgan Dabon and me Well Lucas, with 602 00:39:45,480 --> 00:39:48,240 Speaker 1: additional production support by Love Beach and me Versus Lewis. 603 00:39:49,440 --> 00:39:51,840 Speaker 1: Special thank you to Michael Davis, Sadam sims Ins a 604 00:39:51,920 --> 00:39:54,719 Speaker 1: car Savon Jan you know like the wine. Yes that's 605 00:39:54,760 --> 00:39:57,839 Speaker 1: his real name. Learn more about my guests and other 606 00:39:57,920 --> 00:40:01,919 Speaker 1: tech this innovatives to afro Tech dot count enjoying Black 607 00:40:02,000 --> 00:40:04,840 Speaker 1: Tech Green Money leave just a five star rating on iTunes, 608 00:40:06,719 --> 00:40:10,200 Speaker 1: Go get your money, Peace and love.