All right. Let’s fast forward a little bit. Your Series A was nine months ago. So all in your 18 months in your company and All Things Considered. It’s gotten pretty great in this lesson. We’re now going to move forward and see what happens to your cap table when you raise your next round. The Series B, We’re going to watch what changes happen with some of these important markers we’ve already learned about, such as bringing on new investors, adjusting the employee equity pool, changes to your valuation and obviously dilution. You ready? Let’s do this.

In the last nine months since you raised your series, you used a good portion of that 3 million bucks you raised to hire 30 new employees. You’ve now got salespeople, marketers and product managers who’ve all started to build out their respective teams. In other words, neatly starting to look like a real company. Now, in order to hire all those people. You made competitive compensation offers to them, which included a large number of stock options in the form of ISOs or incentive stock options. And you were able to do that thanks to the expanded equity pool that you created with the series. Okay. You’re with me. Let’s keep going. Furthermore, in the series, AA, your investors set a valuation for your company, right? And from this valuation, they landed on a preferred share price. Then separately, after that, you got a409a valuation done, which helped you establish a fair market value price for your common stock. This is also called the strike price or the exercise price. And remember, the strike price is the value of one share of common stock when you grant it to someone. In other words, it’s the amount on a per share basis that your employees are going to pay when they choose to exercise their stock.

So making sense. All right. So let’s now set the scene. In the last nine months, you hired 30 people and you granted them stock options. Those stock options have a strike price of $0.50 per share, meaning those employees will have the option to buy shares at $0.50. Okay. So right now, all of these new employees are roughly nine months into their employment. Right. So they’re still within their first year. But in the next three months, something big and important is going to start happening to them. They’ll be hitting their one year anniversary at your company. And remember, according to their vesting schedule, they’re looking at a one year cliff. So the moment they hit one year, bam, they’ll now be eligible to buy the first 25% of their shares at a strike price of $0.50. Your employees are obviously feeling pretty good about this. The company’s doing well and those shares are looking like they’re going to keep growing in value over time. Super exciting and everyone’s feeling optimistic. So what’s next? Well, investor number one is excited, too, and they’re encouraging you to keep putting the pedal to the metal. They want you to take advantage of your traction and get mutely in front of more people and start scaling your business. So you can guess what that means. It’s time for more funding. Welcome to your series V. And this time you’re going to up the ante and raise 10 million bucks. So let’s paint a picture of how this race is going to shape up first. Investor number one from your series A wants to lead the next round. They’re going to put in an additional $5 million on a post-money valuation of, wait for it, $37.3 million. So at this point, your company’s definitely growing in value.

Okay. Second, your safe investor, Carol, wants in on the series B as well. She offers 500 K. So you’ve raised 5.5 mil already, which leaves you with 4.5 mil to go. Luckily, your current investors know some people. They put you in touch with two other VC firms. We’ll call them investor number two and investor number three. These new relationships are a good match and they help you fill out the rest of your Series B Fast forward a few weeks and a little back and forth, a couple lawyer meetings and voila, the term sheets are signed and the deal is done. Here’s what the whole thing looks like. All in all, you’ve now got four major investors. You’ve got investor number one from the Series A investor number two and three from the Series B and of course, Carol, from the seed round. Okay. Now that we know who’s going to invest, we need to figure out the price they’re going to pay for their shares. Again, remember what we learned in the series. This is complicated math, but after you do the calculations, the price comes out to roughly a dollar and $0.83. Now, for your series B, you’re going to issue just under five and a half million new preferred shares. So all in all, your company now consists of the following shares that you’ve issued. You’ve got 9 million shares you issued to yourself and your co-founder when you incorporated. You’ve got 100,000 options that you granted to your advisor. Then you raised your Series A and issued 3,213,023 shares to investor number one at the Series A. You also converted Carol’s safe and issued her 209,995 shares. And now in your Series B, you’ve issued 5,466,271 new shares to all of your Series B investors.

So in total, so far, you’ve issued 17,989,289 shares, just under 18 million. But remember, this is just two shares that you’ve issued. There are still some shares in the option pool, which we’re going to get to shortly. Great. So let’s look at the tally. Here’s how many shares all your investors have right at this moment in time. Investor number one has just under 6 million shares. Investors number two and three have roughly one and a quarter million each. And Carol has a total of a little over 480,000. But that’s not all. Remember, up until now, your employee option pool had 1.5 million shares reserved, 100,000 of which have been granted to your advisor. But since you hired those 30 people, guess what? The option pools are almost empty. So as a condition of the series B, your investors require you to create an additional 1 million shares for your employee equity pool. So you keep hiring more employees and grow the company bigger. All right, Let’s now look at your cap table. Adding in all the new ingredients that we just talked about. As you can see here, Carol’s got 209,995 shares. Investor number one has roughly 3.2 million investors. Number two and three have roughly 1.2 million each. You have 4.95 million and your co-founder has 4.05 million. The adviser you hired back in the day has 100,000, and you have a bunch of employees with different amounts of shares depending on how much you granted to them. Now the stuff all founders care about. Let’s talk about dilution. Notice how you and your co-founder still have the same amount of shares that you always did, but that additional funding has continued to dilute your ownership. On day one, you own 55% of the company, and now after the Series B, you own 32.4 or 5%.

But remember, this is just a trade off. In the early days, you own 55% of basically nothing. Now you own more than a quarter of a company that is valued at $37.3 million. Of course, at this point, these are all just gains on paper. Right. But if the company was acquired tomorrow for that price, that’s real money. And the future growth in value could increase your real gains, even if your ownership percentage declines. Of course, your ownership percentage may also matter for other reasons, like voting power and so on. But that’s a discussion for another day. All right. Safe to say we’ve covered a lot of ground. You should seriously be proud of yourself. This is hard stuff. And by taking the time to understand it, you’re setting yourself up for success on the road to building your business.

That said, there’s still some really important points we need to think about, such as what happens in a scenario where there’s money that needs to be distributed back to investors. How’s that supposed to work? Who gets what? And what can you do as a founder to protect yourself? Surprise, surprise. It’s all tracked on the cap table.