investment, stock-options, business-structure, sharesWe are currently working out of an accelerator. The accelerator will take equity in our company in exchange for a small investment.
We have an agreement among the founders as to the split of equity among ourselves which is not under discussion. The question we have is whether to set aside shares for future investments. We want future investments to dilute all current shareholders. (There is no anti-dilution clause in the accelerator’s offer.)
What is recommended in terms of setting aside shares for future investments?
For example, if we say the accelerator is taking 6% and the founders own the other 94%, if we set aside 30% for future investments and the accelerator takes its 6% from the set aside shares and we then get an investment purchasing 24% of the companies stocks, then the founders will own 70%, the investor 24% and the accelerator 6%.
However, if we set aside the option pool of 24% only after we receive the 6%, then the accelerator will be immediately diluted from 6% to ((1 - 0.24) * 6%) = 4.56% and us founders will thereby retain an extra 1.44% of the company (71.44% total).
Would the accelerator be comfortable being diluted immediately after investing in us (from 6% to 4.56%) so that we can set aside shares for future investments, and would we need their permission to do this?
Also, what if we were not to set aside any shares and merely issue new shares each time there’s a new equity purchase in the company?
It is the normal process to dilute all equity holders as new shares are created, whether the shares are for investors or options. Investors will often require an option pool be established, they will usually want that pool created prior to their investment. That shields their equity from dilution, but only because the pool is actually created before they invest. They can’t prevent future dilution.
This sounds like a question for the accelerator you’re working with, and may be defined in whatever contract you’ve signed with them. I would assume that they would only accept non-diluting shares, and that any dilutions would have to be from the founders’ end, but check your contract.
You would usually discuss the creation of an options pool while negotiating the terms of the round of investment. If you are planning to do something that will dilute a shareholder and the agreement is not yet in place you should openly discuss it. They may be all for it, as many investors like you to put option pools in place.
The way the rounds work are that you don’t set aside shares to be bought. Each round you create new shares which are issued to the new investors which is why people get diluted. But hopefully the price of each of their share will go up with each round and so their investment will grow in financial terms.
It is wise to consider looking after your founder equity, as it can be important to some investors, especially when looking at series A.
However you look after this equity by ensuring you negotiate the valuation well at each round. This negotiation is made much easier if you obviously add serious value to the company through your activity between rounds - so things like growing the right team, bringing in customers or clients, identifying the right mentors or non execs.
Ensure you add considerable value so you can negotiate a good price then when the raise comes you will have an idea of what valuation you need in order to get the money you want while maintaining your majority shareholding as a group.
I’ll quickly paraphrase what I understood from the question, please correct me if I got something wrong.
Start case:
100% founders (fou)
Option A:
70% fou
6% acc
24% reserve
Option B:
1. 94% fou
6% acc
then
2. Issuance of new shares in the amount of 31.58% of the old shares (that’s almost exactly 24% afterwards)
94/131.58 fou ~71.4%
6/131.58 acc ~4.6%
31.58/131.58 reserve ~24%
So your calculation is correct, it is not the same. But this is probably the point where they misunderstood you.
Option C
1.
94% fou
6% acc
then 2. part of the founders shares go into reserve (remember, that’s not so unbelievable, that’s where the 6% came from, too - unless you issued new shares for that, but then it had the same effect)
70% fou
6% acc
24% reserve
Now, the real question is, can you just dilute their shares?
Honestly, I don’t know. Where are you registered, what kind of company is it? Afaik in Germany stock companys (Aktiengesellschaft (AG)) (I suspect for listed stock companys that’s the same everywhere) have to issue share options to the old stock holders, so there would be stock options for the ~30% new shares issued which would go to the old shareholders (you and the acc). Those can then be sold or used to buy new stock. So the accelerator would get paid for the dilution of their shares as somebody else can only invest in the shares if their options get sold.
Again, I don’t know how it is for your kind of company, but you should find out. Plus, overruling a minority shareholder on the decision of issuing new shares is possible (if not specified otherwise), but might lead to hard feelings, which you don’t want at this point I assume.
So, talk to them. Make clear you meant option B not C and then see how they (probably) don’t think that’s just the same.
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