Capital Raise Model Overview
Why do I need a Capital Raise Model?
As a founder, you want to craft a capital raising strategy that’s both practical and promising, benefiting not only your investors but also your and your team. This requires a clear grasp of the investment terms and impacts to ensure you get a fair deal for all of your hard work to build a successful company. The Pro-Forma model helps you understand the terms, run scenarios, and build out your plan. Our goal is to equip you to negotiate favorable terms so that everyone wins.
When should I create a Capital Raise Model?
Planning a capital raise? Use this tool to
- Create investor reports for your pitch
- See the impact of investment terms
- Forecast valuation over time
- Test exit scenarios
What do I get?
Reports generated include:
- Cap Table – standard format ownership breakdown of shareholders, including all details for SAFE and Convertible Notes with conversion discounts
- Shareholders – breakdown of shareholders for each round
Terms Summary – all the key terms (defined for you) that investors want to know in one place - Investor Return – exit proceeds waterfall and return multiples at a given date and valuation so you can see the impact of the various terms and financing rounds
- Financial Statements – capital raise model inputs are integrated with your financial forecast
Building my Capital Raise Model?
Founding
At incorporation, a number of shares will be issued and distributed among the founders. As additional shares are issued, the founders will own a smaller percentage of the company, but the value of their shares will increase.
To fill out the “Founding” section of the Pro-Forma capital raise model, edit the following fields in the input dropdown:
- Date: This is the actual or anticipated date of incorporation and must come before the date of any other equity transactions.
- Founders’ Contribution: Enter the amount of cash – if any – the Founder(s) contributed at the launch of the firm.
- Shares: Founding shares are the number of shares defined when the company is initially structured, before any employee options or equity financing. 10 million shares is recommended, even for small startups. These shares may be split between multiple founders (see the Shareholders tab). Shares in the company are not transferred to new investors or contributors; rather, new shares are “issued”, which dilutes the value of the initial shares.
Adding Other Transaction Types
You can select the ideal transaction type for your specific stage in your capital raise journey. In this guide, we’ll explore a comprehensive list of common industry-standard transaction types to help you make informed decisions about financing your business’s growth. Whether you’re in the early stages seeking seed funding or planning a major expansion through a Series A round or beyond, understanding these transaction types is vital for a successful capital raise.
Convertible Note
A Convertible Note is a form of debt that converts into equity when a future round of equity is raised, usually a Series A. A convertible note’s share price and valuation will be determined by the terms of the future conversion round. Interest on the note is typically paid in additional shares. This is known as “PIK” or Paid in Kind interest.
Example: Convertible Note investors invest $500,000 with a discount of 20%, with an interest rate of 5% paid in shares. One year later, a Series A is raised at $5 per share. The Note is converted into shares at (1 – 20%) x $5 = $4 per share. This means the Convertible Note investors receive $500,000 / $4 per share = 125,000 shares, plus 5% interest * $500,000 / $4 per share = 6,250 interest shares. In the event that the Valuation Cap gives the Convertible Note investors a lower valuation, then that is the price of the shares. Convertible Note investors always get the lowest price per share based upon both methods of valuation of the Discount and the Valuation Cap.
Simple Agreement For Equity (SAFE)
A Simple Agreement For Equity, or SAFE, is an agreement for equity when a future round is raised, usually a Series A. A SAFE’s share price and valuation will be determined by the terms of the future conversion round. Although it works much like a Convertible Note, a SAFE is simpler since it is technically a type of warrant, not debt, and it does not accrue interest.
Example: SAFE investors invest $500,000 with a discount of 20%. One year later, a Series A is raised at $5 per share. The SAFE is converted into shares at (1 – 20%) x $5 = $4 per share. This means the SAFE investors receive $500,000 / $4 per share = 125,000 shares. In the event that the Valuation Cap gives the SAFE investors a lower valuation, then that is the price of the shares. SAFE investors always get the lowest price per share based upon both methods of valuation of the Discount and the Valuation Cap.
Common Round
In a priced common round, investors purchase ownership (shares) at a negotiated fixed price. The company receives seed capital, and the investors receive common shares in the company. The pre-money valuation determines how much ownership investors receive. Common shares entitle an investor to a portion of common proceeds, but this can be diluted both by the issuance of new shares and by “preferences” given to investors in a Preferred Round. Common Rounds are raised before Preferred Rounds but are paid out later in a liquidity event. Common shares may include shareholder rights such as financial reporting and voting rights.
Preferred Round
In a Preferred Round (usually a Preferred Series A, B, C, etc.), the company issues Preferred Shares. Preferred Rounds are financing rounds after the initial seed funding. Because Preferred Round investors are buying in at a higher valuation, they are incentivized through preferences such as dividends, liquidation preferences, or anti-dilution rights. If the security in a Preferred Round is “Participating”, the investors will receive a portion of the common proceeds in addition to their preferences.
Options
Options give their holders the right to purchase stock at a given Exercise Price (or “Strike Price”). They are often granted to employees and other contributors in exchange for their services. For the purposes of this model, options are not exercised (converted to shares) until a liquidity event.
Example: An employee is granted 100,000 shares with an Exercise Price of $1.00/share. Upon a liquidation event that values the company at $10.00/share, the employee receives a “Cashless Exercise” of $9.00/share ($10.00/share Exit Value, less the Exercise Price of $1.00/share).
Producing a Cap Table
A capitalization table, or cap table, shows the ownership breakdown of the company, based on the number of shares owned. Since options are often not exercised (converted to shares) until a liquidity event, they are shown in a separate column.
Shareholders
Enter the individuals or entities that hold shares in this round to track their respective investment amounts and number of shares.
Why it matters:
An investment round of $1m may come from a single investor or from 40 investors.
What to focus on:
If there are multiple investors, you can break down individual ownership here. You can edit the investors table for whichever round is selected.
Terms
The terms summary outlines the terms you have selected for a specific investment round and provides a concise snapshot of the key numbers investors want to see.
Why it matters:
The Terms Summary tells investors what they need to know about an investment round.
What to focus on:
Make sure the terms make sense for both you as the founder and for the investors in that round.
Investor Return (Proceeds Waterfall)
Summary:
The Investor Return report is set up in the form of a “proceeds waterfall” that shows the equity distribution and potential returns at a given exit value. This shows the order in which cash gets paid out (not accounting for taxes and deal expenses). The investor return table shows the return multiple for each investment round, given the exit assumptions. Investors look to invest in the companies that will yield the highest and quickest returns on their investment.
Why it matters:
While a cap table shows the ownership breakdown, it doesn’t account for certain aspects of a liquidation that will affect a founder’s true payout, such as dividends and liquidation preferences. Referencing this report helps to ensure that a target payout will have favorable terms for both founders and investors. Plus, investors will be thrilled to see this kind of report in your pitch deck.
What to focus on:
Enter different values in the “Exit Value” box and see how the payout changes at the different levels. For example, what would your payout be if the company only sold for half of the target amount?
Make sure the payout makes sense for you as the founder, but is also attractive to investors. Seed-stage investors typically look for at least 30% IRR since this is a high-risk investment.
Capital Raise Model Inputs
Shares
Founding shares are the number of shares defined when the company is initially structured, before any employee options or equity financing. 10 million shares is the most common amount, even for small startups. These shares may be split between multiple founders (see the Shareholders tab). Shares in the company are not transferred to new investors or contributors; rather, new shares are “issued”, which dilutes the value of the initial shares.
Why 10 million shares?
Most tech startups launch with 10 million founding units, which may sound like a lot, but there are three perfectly good reasons for this:
Translates into an easier-to-grasp price per unit
Imagine a startup that is founded with only 100 units and you are trying to raise a $1m of seed capital at a pre-money valuation of $10,000,000. That means the price per unit the investor pays is as follows:
Seed round $10,000,000 valuation / 100 units = $100,000 per unit
A rather ridiculous price! And the investor only gets 10 units, an absurdly small number.
Further, if you went public with a $100m valuation, your price per unit would be $1m per share, not exactly a typical price per share in the range of $5 – $100+ that is normally seen in public equities.
$1m / share? (red X)
By contrast, let’s see how 10,000,000 founding units look:
Seed round: $10,000,000 Valuation / 10,000,000 units = $1 per unit
IPO: $100,000,000 Valuation / 10,000,000 units = $10 per unit
It’s also a lot easier to focus your team on growing the value of the company from $1 per share to $10 per share, numbers they can easily multiply by their number of options to keep them motivated.
Translates into a more meaningful amount for co-founders and employee options
Imagine that you want to give your co-founder 10% of the company at launch. Imagine your co-founder trying to talk their loved ones into why they are quitting their job to join a startup in exchange for a whopping 10 shares.
And the same for employee options. Offering your CFO 100,000 units (1% of your company) just sounds a whole lot more exciting than only 1 share of stock.
It’s an amount that investors are used to seeing on a Cap Table
When in doubt, look to benchmarks and standard practices. Most tech startups launch with either 1 million, 10 million, or 100 million units, with 10 million units being the most prevalent. Why not follow standard practice to avoid being forced into an expensive stock split and amending your organization documents right out of the gate?
Date (All Transaction Types)
This is the month that the round will be closed or the shares will be issued.
Investment
This is the total cash investment amount for the round. We have preloaded the market average investment amount for each round type.
Pre-Money Value
This is the value of the company before raising equity, calculated as the price per share times the number of shares before investment.
Example: Founders have 10,000,000 shares, and they issue 2,500,000 shares at $1 per share. Pre-money value is 10,000,000 x $1 = $10,000,000
Post-Money Value
After raising capital, the value of the company increases by the amount raised. This is calculated as the price per share times the number of shares after investment.
Example: Founders have 10,000,000 shares, and they issue 2,500,000 shares at $1 per share. Post-money value is 12,500,000 x $1 = $12,500,000. This can also be calculated as pre-money value plus investment amount.”
Annual Dividend
A dividend is a cash payment a company makes to its preferred shareholders at a negotiated annual percentage rate, such as 6% of the preferred equity invested. For most early stage companies, and for purposes of this model, the full value of the dividend is accumulated over the life of the investment and is paid out at an exit or liquidity event (see the Investor Return report). For example, a preferred dividend of 6% annually on a $10m Series B investment would be 6% x $10m = $600k per year.
Dividends may accrue using either a “Simple” or “Compound” calculation. For a simple dividend, the same amount is accrued each year. For a compound dividend, a dividend is owed on the unpaid, accrued dividends. For example, a cumulative simple annual dividend of 6% on a $10m Series B would accumulate at the rate of $600k each year, but a cumulative compound annual dividend of 6% on a $10m Series B would be $600k in the first year, but $636k in the second year (6% x ($10.0m investment + $0.6 of unpaid dividend)), and so forth.
Liquidation Preference
A Liquidation Preference is the multiple of the investment amount that is paid back to preferred investors before the rest of the cash is divided between shareholders. This can help ensure that later investors will receive a worthwhile return. If there is no liquidation preference, enter 0.
Participation Preference
Participating preferred shares receive both the value of their preference payments (such as dividends and liquidation preferences) AND the value of their share of the common proceeds once those preferred shares convert to common shares. Non-participating preferred shares receive either their preferences paid out OR the value of their shares converted to common shares, whichever is greater.
Anti-Dilution
Anti-dilution protects investors from future “Down Rounds”, where the valuation of the company decreases. In the case of a down round, an anti-dilution provision in the investment agreement grants new shares to the investors in the previous round. A “Full Ratchet” form of anti-dilution calculation grants shares as if the initial round had invested at the new (lower) value. A “Weighted Average” calculation grants shares as if the initial round had invested at a weighted average value between the previous round and the down round. This model applies the “Broad-Based” form of a weighted average calculation. For example, if an investor bought 1m shares at $2 each in a Series A, but later a Series B round was priced at $1 per share, then that Series A investor gets another 1m shares under a “Full Ratchet” clause, but gets only 500k additional shares under a “Weighted Average” clause. An antidilution provision can can significantly dilute the ownership of founders and common investors who do not have anti-dilution preferences in the event of a Down Round.
Ownership
Enter the percent ownership given to this round of investors. This is used to calculate the number of shares issued at this stage. The net ownership percent will decrease as additional shares are issued.
Price-per-Share
This is the investment amount divided by the number of shares received. Price per share normally increases with each round issued, unless the company experiences a “Down Round” which is a future financing at a lower value than a previous financing. The value of the company is the total number of shares times the price per share.
Discount
The Discount is applied to the price per share of the conversion round. Because Convertible Note and SAFE investors invest earlier than the conversion round, they typically receive a lower price per share, which gives them more shares for their investment. If the Discount is 20% and the conversion round share price is $5, the Convertible Note or SAFE converts at (1 – 20%) x $5 = $4 per share.
Example: SAFE investors invest $500,000 at a discounted rate of 80%. One year later, a Series A is raised at $5 per share. The SAFE is converted into shares at 80% x $5 = $4 per share. This means the SAFE investors receive $500,000 / $4 per share = 125,000 shares.
Interest Rate
Convertible Note holders often receive interest on their initial investment until the note converts to shares. The interest is paid out in additional shares at the close of the Conversion Round.
Valuation Cap
The Valuation Cap (or “Conversion Cap”) determines the maximum price per share that can be applied to convert a Convertible Note or SAFE. This helps to ensure that the Convertible Note or SAFE investors receive a reasonable amount of ownership, even if the value of the company increases more than expected. Shares are converted based on either the Discount or the Valuation Cap, whichever results in a lower price per share.
Example: SAFE investors invest $500,000 at a discounted rate of 80%, with a valuation cap of $6,000,000. One year later, a Series A is raised at $5 per share at $10,000,000 pre-money valuation. The valuation cap divided by the pre-money value is $6,000,000 / $10,000,000 = 60%. Since this rate is lower than the discounted rate of 80%, we use the 60% rate. 60% x $5 per share = $3 per share.
Conversion Round
For a Convertible Note or SAFE investment, investors’ shares are issued as part of a future priced round, or “Conversion Round”. The valuation and terms of the Conversion Round (usually a Series A) will determine how many shares are issued to Convertible Note or SAFE investors.
Exercise Price
Options and Warrants are issued with a fixed “Exercise”, or “Strike” price that must be paid to convert them into shares. For purposes of this model, shares are only exercised at an exit (see the Investor Return report). For example, if an employee was granted 25k shares of common stock at an exercise price of $1 per share in a company that eventually sold for $20 per share, their net value of each share of common stock would be $19 per share ($20 per share, less an exercise price of $1 per share) x 25k shares = $475k.
Ownership Before Options
This is the percent of the shares owned by each investment round. Since options do not become shares of stock until they are exercised, this value ignores options and only takes into account the “outstanding” shares.
Example: Founders hold 10,000,000 shares of stock and investors are issued 5,000,000. Investors own 33.3% of the company.
Fully Diluted Ownership
This is the percent of the shares owned by each investment round. If any options have been issued, this treats them as if they have been exercised (converted into shares).
Example: Founders hold 10,000,000 shares of stock, investors hold 5,000,000, and options have been issued for up to 5,000,000. Investors own 25% of the company on a “Fully-Diluted Basis”.
Total Exit Value
Enter a potential exit value to see the proceeds breakdown for each shareholder category. This represents the sale value of the business minus any debt repayment, deal expenses, or fees.
Exit Date
Enter the potential date of a sale or investor payout. This is used to calculate an annualized investor return rate.
Common Proceeds
Common proceeds are paid out based on fully-diluted ownership of shares on the cap table.
Return Multiple
This is the total payout divided by the investment for this round. This value does not take into account the amount of time required to achieve this return.
IRR
This is the effective percent return investors receive each year. For context, the S&P 500 index has yielded around 8% annual return on average over the last 50 years. This value helps investors determine whether the investment is worth the risk of this investment.