You’ve raised a friends and family round using bridge notes and SAFEs, and now you’re ready to raise your Series A. Without convertible instruments, pricing your round is pretty straightforward: the new shares will represent the investment portion of the post money valuation. For example, a $2 million Series A investment at a $10 million post money valuation means that the Series A will have 20% of the outstanding common stock equivalent after the financing.
Now, let’s say you do have convertible instruments: how does that impact the price per share of the round? It’s not quite a new investment, but there’s no common stock equivalent for it either! There are three ways you can calculate the new class’s price per share to account for the convertibles, and exactly how you do so is something to negotiate during the term sheet.
Existing holders always get diluted, the question is how much. Let’s look at three possible methods for calculating the price per share in an equity financing round—Dilution of Existing Holders, Dilution of New and Existing Investors, and a Blended Compromise.
Dilution of Existing Holders
Using this method in the example above, new Series A investors get their 20% of the company, and the note holders get a percentage of the company (or a specific number of shares if there is a valuation cap that is reached) based on their invested money, but still at the $10MM post money valuation. So, if there are $500,000 of notes outstanding (with no valuation cap or discount), the note holders will end up with 5% of the company. All of this dilution comes from the founders.
Dilution of New and Existing Investors
On the other end of the spectrum, you can calculate the price per share of the new class as though the convertibles didn’t exist, and then convert the notes and SAFEs according to their terms (i.e., if there is a valuation cap or discount rate, you price the shares as those take affect). This means that there are more shares of the new class than the post money valuation suggests, so new investors share the dilution with the founders.
The Blended Compromise
The compromise is to consider the notes or SAFEs as new money. In our case above, there would be $2.5MM of new money for a post money valuation of $10.5MM. The price per share for the new investors is then calculated using that new percentage of ownership, and the price for noteholders without valuation caps is determined from that price per share.
Fidelity's Next Round Planner and Exit Scenarios allow you to pick which method to use. Log in today to model your company’s next round or explore the returns and your investors would see in a potential future exit.
Sample scenarios are for illustrative purposes only.
