So, Mr. A & Ms. B start a company, StartUp from garage
Step 1
You get registered with govt. issuing 100,000 shares. A & B each own 50%, i.e. 50,000 shares. The value of the startup is 0
Step 2
Seed Round
They approach a friend, F seeking $100,000 to run business for which F gets 20% of company. If 20% of StartUp is worth $100,000, 100% of StartUp is now valued at $500,000. Now
A> 40,000 shares worth $200,000
B> 40,000 shares @ $200,000
F> 20,000 shares @ $100,000
Step 3
Series A round
After 2 years, Startup expands. Hire more, rent office. Venture Capitalists(VC) are approached
Pre-Money Valuation is current value. Post-Money Value is value of StartUp AFTER investment. A, B & VC decide on post-money valuation of $6 million
VC invests $1.5 million (25% of 6 mil) for 25% stake in company.
Now, A, B & F just own 75% of the company. They got DILUTED.
But how are shares distributed?
New shares are issued. Initial 100,000 shares, owned by A,B, & F is now just 75% of the company.
So 100% of the company is 133,000 shares (Basic ratio)
Value of one share = $6 million/133,000 = $45
VC : 33,000 shares worth $1.5 mil
A & B: 40,000 shares each @ $1.8 mil each
F: 20,000 shares @ $0.9 mil
Founders are now millionaires
