While many of us wonder in awe when we hear/ read stories of the startup companies getting funded and VC’s making money out of an exit through Sale/ IPO, individual founders and investors these days constantly struggle to value two important business metrics for a startup on their personal agendas:
- Valuation
- Equity
There are many theoretical models on how one should value a startup but as they say these days
“Valuation is much of an art rather than science and no matter what you do, an accurate valuation is and shall be a certain impossibility for sure”
What we see these days is much of an “Emotions Driven Valuation” rather than an accurate calculative one for many cases.
Let us talk about one such case where series of valuation led to pooling of investors as well as increment in equity at each stage. Then lets will find out how much each party is going to cash out when real time sale/acquisition happens for the company.
There is a concept called Cap Table (or Capitalization table) which lists down elements such as shareholding pattern / value of equity at each stage of a company for its founders, investors and Venture Capitalists.
STAGE 1 : IDEA / INITIAL WORK
In this case, we are talking about 3 guys- Prakash, Vijay and Suresh, fresh out of a college having a cool business idea and a product they named PRAVIJS in 2012. They allocate 40% share each to Prakash and Vijay who are the brains behind the idea and have also worked on the technology and since Suresh joined them a bit late and is responsible only for getting the commercial job(s) done they allocate him 20%. To create a Cap table, we will allocate initial number of shares say 1 Lakhs divided for shareholder in the below pattern ( this is a founder pool also known as Common Shareholder pool):
| Shareholder Name | Date of Issue | Number of Shares | % of Total |
| Prakash | 01-03-2012 | 40,000 | 40.00% |
| Vijay | 01-03-2012 | 40,000 | 40.00% |
| Suresh | 01-03-2012 | 20,000 | 20.00% |
| Total | 1,00,000 | 100.00% |
STAGE 2: ANGEL INVESTORS ROPED IN
| Common Shareholders | Shareholder Name | Date of Issue | Number of Shares | % of Total | C.S Value |
| Prakash | 01-03-2012 | 40,000 | 32% | 40 lakhs | |
| Vijay | 01-03-2012 | 40,000 | 32% | 40 lakhs | |
| Suresh | 01-03-2012 | 20,000 | 16% | 20 lakhs | |
| Total | 1,00,000 | 80% | 1 Crore | ||
| Preferred Shareholders | Shareholder Name | Date of Issue | Number of Shares | % of Total | P.S Value |
| Mr. Shah | 04-05-2013 | 25,000 | 20% | 25 lakhs | |
| Total | 25,000 | 20% | 25 lakhs | ||
| Net Total | 1,25,000 | 100% | 1.25 Crore |
They had devoted their final year in creating a product and have just approached an angel investor to help them kick start their operations with some investment. Mr. Shah is a hotelier and an angel investor and agrees to fund them for an angel investment of 25 lakhs INR for around 20 % stake in their company. Now important point to note is that whenever an investor ropes in, he comes in as a Preferred Shareholder which means that he gets paid first in case of sell out / profit sharing and them the remaining goes to common shareholders. Also if the founders give 20% stake to an investor, it does not mean that they reduce their number of shares and sell it to the investor. The number of shares remain fixed (until unless they actually sell it to investor / any other 3rd party). To accommodate for 20% stake for angels, the total shares will be increasing in proportion and the %age equity for founders goes down while number of shares for them remain fixed.
We see that with the investment of 25 lakhs @ 20 %, the Net worth of company is valued at 1.25 Cr at this stage and the value for common shareholder @ 40 lakhs /20 lakhs. Also you can calculate the price of each share as 1.25 Cr / 1.25 Lakhs @ Rs 100.
STAGE 3: THE BALL ROLLS TO ANOTHER SEED FUND
It is already 6 months and the idea gains virility. Appears like their efforts and investment over marketing, SEO and sales have paid off and investors have started valuing the idea. Hence the first investors Premium Ventures have decided to invest in PRAVIJS. They are willing to pool in 5 Cr for 20% dilution. However, they have a condition of 2X liquidation preference. Also at this stage Mr. Shah decides to liquidate his holding by 50 % to PRAVIJS at the current share price.
Now lets talk about the term Liquidation preference. When any investor says he is looking for a liquidation preference of say 2X times his / her investment, it means that anytime during the cash out/ sale, it is guaranteed that he will get the minimum of 2 times his investment. So if PRAVIJS is sold for say 10 Crores or less, as per liquidation preference, Premium guys get 10 Crores (or <10 Cr sale price) and nothing is left for founders. If say it is sold at a much higher value, Premium guys will get either the 20% (or whatever is their pattern during the cash-out) or 10 Crores whichever is higher.
So, CAP table now looks like below:
| Common Shareholders | Shareholder Name | Date of Issue | Number of Shares | % of Total | C.S Value |
| Prakash | 3/1/2012 | 40,000 | 26% | 6.4 Crore | |
| Vijay | 3/1/2012 | 40,000 | 26% | 6.4 Crore | |
| Suresh | 3/1/2012 | 20,000 | 13% | 3.2 Crore | |
| Total | 100,000 | ~64% (r.e) | 16 Crore | ||
| Preferred Shareholders | Shareholder Name | Date of Issue | Number of Shares | % of Total | P.S Value |
| Mr. Shah | 5/4/2013 | 25,000 | 16% | 4 Crore | |
| Premium Ventures | 11/4/2013 | 31,250 | 20% | 5 Crore | |
| Total | 56,250 | ~36% (r.e) | 9 Crore | ||
| Net Total | 156,250 | 100% | 25 Crore |
(r.e = rounding errors)
The net worth of the company at this stage is 25 Crores. The share price will be Rs 1600 per share which is 16 times the previous round.
STAGE 4: AN YEAR LATER : SERIES A FUNDING
You can google Series A and Wikipedia covers it beautifully when they say that Series A funding is company’s first significant round of VC investment. Basically till above stage, PRAVIJS was relying on seed funds only used for product creation, initial marketing, hiring best talents, doing sales, cold pitch etc. But now is the time to go big and go live on media with their final offering.
So, Charge Capital comes in at this stage and agrees to invest around 100 Crores on this idea @ another 20 % stake for them. VC’s and Founders evaluate it is not the best proposition to go for and re-negotiate. Final deal is closed in for a 15 % stake for Charge Capital @ 100 Crores with 1X liquidation preference for Charge and the team agrees for it. However Charge Capital has demanded to keep an ESOP of at least 5 % for new employees/ visionary leaders for outside who can join / lead the company.
Scenario 1: Charge Offering
| Common Shareholders | Shareholder Name | Date of Issue | Number of Shares | % of Total | C.S Value |
| Prakash | 3/1/2012 | 40,000 | 20.5% | 102.4 Crore | |
| Vijay | 3/1/2012 | 40,000 | 20.5% | 102.4 Crore | |
| Suresh | 3/1/2012 | 20,000 | 10.2% | 51.2 Crore | |
| Total | 100,000 | ~51% | 256 Crore | ||
| Preferred Shareholders | Shareholder Name | Date of Issue | Number of Shares | % of Total | P.S Value |
| Mr. Shah (pref A) | 5/4/2013 | 25,000 | 12.8% | 64 Crore | |
| Premium Ventures (pref B) | 11/4/2013 | 31,250 | 16% | 80 Crore | |
| Charge Capital (pref C) | 11/24/2014 | 39,062 | 20% | 100 Crore | |
| Total | 95,313 | ~49% | 244 Crore | ||
| Net Total | 195,313 | 100% | 500 Crore |
The price per share at this stage is 25,600 INR and the individual share is shown above.
Scenario 2: Negotiated Deal
| Common Shareholders | Shareholder Name | Date of Issue | Number of Shares | % of Total | C.S Value |
| Prakash | 3/1/2012 | 40,000 | 20.5% | 136.7 Crore | |
| Vijay | 3/1/2012 | 40,000 | 20.5% | 136.7 Crore | |
| Suresh | 3/1/2012 | 20,000 | 10.2% | 68 Crore | |
| ESOP Pool | 11/24/2014 | 9,615.38 | 5% | 33.3 Crore | |
| Total | 109,615 | 56% | 374.7 Crore | ||
| Preferred Shareholders | Shareholder Name | Date of Issue | Number of Shares | % of Total | P.S Value |
| Mr. Shah (pref A) | 5/4/2013 | 25,000 | 13% | 85.3 Crore | |
| Premium Ventures (pref B) | 11/4/2013 | 31,250 | 16% | 106.7 Crore | |
| Charge Capital (pref C) | 11/24/2014 | 29,296.88 | 15% | 100 Crore | |
| Total | 85,547 | 44% | 2,920,000,000 | ||
| Net Total | 195,162 | 100% | 6666666667 |
In this case, price per share is 34,159 INR and the individual share is as above. Definitely a better deal than the one offered initially but comes with a liquidation preference.
However as it happens, Mr. Shah strikes out a deal as he desperately looks out for an immediate liquidity at this stage. Mr. Shah who is sitting on >300 times his initial investment is undeterred much by accurate numbers and he is willing to sell half of his portfolio for even a handsome discount of 50 % to the investors. Charge strikes out a deal and his stocks are liquidated at a share price of 17,000 flat per share and Mr Shah pockets out 21 Crores at this stage and remaining still as part of his preferred shareholder pool.
The Cap table looks as per below :
| Common Shareholders | Shareholder Name | Date of Issue | Number of Shares | % of Total | C.S Value |
| Prakash | 3/1/2012 | 40,000 | 20.5% | 136.6 Crore | |
| Vijay | 3/1/2012 | 40,000 | 20.5% | 136.6 Crore | |
| Suresh | 3/1/2012 | 20,000 | 10.2% | 68.3 Crore | |
| ESOP Pool | 11/24/2014 | 9,615.38 | 5% | 32.8 Crore | |
| Total | 109,615 | 56% | 374.4 Crore | ||
| Preferred Shareholders | Shareholder Name | Date of Issue | Number of Shares | % of Total | P.S Value |
| Mr. Shah (pref A) | 5/4/2013 | 12,500 | 6.4% | 42.7 Crore | |
| Premium Ventures (pref B) | 11/4/2013 | 31,250 | 16.0% | 106.7 Crore | |
| Charge Capital (pref C) | 11/24/2014 | 41,796.88 | 21.4% | 142.8 Crore | |
| Total | 85,547 | 44% | 292.2 Crore | ||
| Net Total | 195,162 | 100% | 666.6 Crore |
STAGE 5: CASHING OUT AN YEAR LATER
The company has really gained superior momentum but definitely faces challenges w.r.t competition and ever changing consumer demands. They struggle for an year to ensure they create better equity for all stakeholder but there is a limit at this stage they can do as market is flooded with offerings. Their growth rate is an audacious 20 % with the hard work and also kudos to the new COO joined under the ESOP bucket of 5 % (along with few directors).
A billion dollar company based out of US decides to invest in India and acquire PRAVIJS as part of their expansion strategy. Financials are evaluated and they are willing to acquire PRAVIJS at a total of 800 Crores
Now for 800 Crores, the price per share will be 40,897 which is approximately 20 % higher than the Series A valuation. Since it is sold at a higher price than CHARGE CAPITAL’s valuated price, the SERIES A investor will be paid as per the Share price of 40,897 and the cash out matrix is as below :
| Common Shareholders | Shareholder Name | Number of Shares | % of Total | Cash Out |
| Prakash | 40,000 | 20.5% | 163.59 | |
| Vijay | 40,000 | 20.5% | 163.59 | |
| Suresh | 20,000 | 10.2% | 81.79 | |
| ESOP Pool | 9,615.38 | 5% | 39.32 | |
| Total | 109,615 | 56% | 448.29 | |
| Preferred Shareholders | Shareholder Name | Number of Shares | % of Total | |
| Mr. Shah (pref A) | 12,500 | 6.4% | 51.12 | |
| Premium Ventures (pref B) | 31,250 | 16.0% | 127.80 | |
| Charge Capital (pref C) | 41,796.88 | 21.4% | 170.94 | |
| Total | 85,547 | 44% | 349.86 | |
| Net Total | 195,162 | 100% | 800 Cr |
So, three years down the line, each founder is paid up 160 Crores / 80 Crore / 40 Cr(employee pool. Mr. Shah pockets out total of 51+21=72 Crores out of 25 lakhs he invested (288 times his investment – yes that’s why everyone should invest in real estate so that few smarter ones like him can earn more!!!)
Premium pockets 130 Cr which is 26 times their investment and Charge gets 170 Cr which is still 40 % return on their investment in one year. As you see the multiplication factor and ROI decreases as you move from being an angel investor to a Series A VC in this kind of a deal.
Now suppose PRAVIJS did a bad job once they were incorporated and ran into loss of business / no traction from consumers and bad reviews all around. It wont have pocketed them a sale first of all and might have forced them in extreme cases to go either bankrupt or sell atleast to make their investors happy. One such scenario where we say the sale happens for suppose 200 Crores (way less than they expected).
Now since Charge Capital is a preferred stakeholder, they are paid up 100 Crores as a priority in this deal and remaining stocks they had bought from Mr. Shah will get the valuation per the price.
At 200 Crore, the share price is INR 10,247. However for the 29,300 shares Charge owns they will be paid up @ Share price of 34,159 , the rate at which they initially invested and remaining 12,500 at the share price of INR 10,247. So cash out scenario for the remaining share will be as below :
| Common Shareholders | Shareholder Name | Number of Shares | % of Total | Cash Out |
| Prakash | 40,000 | 24.1% | 24.1 Cr | |
| Vijay | 40,000 | 24.1% | 24.1 Cr | |
| Suresh | 20,000 | 12.1% | 12 Cr | |
| ESOP Pool | 9,615.38 | 6% | 5.7 Cr | |
| Total | 109,615 | 56% | ~66 Cr | |
| Preferred Shareholders | Shareholder Name | Number of Shares | % of Total | |
| Mr. Shah (pref A) | 12,500 | 7.5% | 7.5 Cr | |
| Premium Ventures (pref B) | 31,250 | 18.8% | 18.8 Cr | |
| Charge Capital (pref C) | 12,500.00 | 7.5% | 7.5 Cr | |
| Total | 56,250 | 44% | ~34 Cr | |
| Net Total | 165,865 | 100% | 100 Cr |
Not bad for founders and angels for sure . Founders still get 24 Cr/12 Cr / 5 Cr each and Mr. Shah pockets a total of 21+7.5=28.5 Crore in this case (110 times only this time eh!). Premium guys cash out at 18.8 Crore (~3 times their portfolio in 3 years !) and Charge loses overall this time as they get a total of 107.5 Cr (out of 121 Crore they invested) – So you can imagine the pressure from Charge Capital on the Board of Directors during this kind of scenario. But hey- if the company is going to pits, better cash out now than ever !
Thanks for reading this. Love to hear your comments and suggestions on the article !
[About the author: Anand Arora has been working in the field of Product/ Business Innovation in organizations such as 
Indian Oil, Unilever and PepsiCo. He is an IIT alum with 10 years industry experience and is passionate about new technology, startups and books.
Currently he is working in the area of Internet of things and is excited to be part of the next big thing that will transform many industries in future. ]
[Note: If you are an early stage startup looking to raise funding, do connect with Pluggd.in team: startups@pluggd.in]
[Image credit:shutterstock]
Best article I’ve ever read on Cap structure. Hats off for providing an amazingly clear picture of everything.
Cool article Manoj. Thanks for sharing. Would love to talk to you about Capshare at some point.
whats the meaning og CS value, PS value, see at the stage 2 they have only 25 lakhs then how the value of compnay is calculated as 1.25cr ??
what are the general terms of investors ? do they take interest on the investment ? can you provide some sample agreements of Angel investor or venture capitalists ?
@ Manoj, thanks very much for your valuable feedback and the CAP table has been changed accordingly ! Basically Charge gets 100 Cr as part of their liquidation preference and the remaining 100 Cr is distributed according to the prevelant share price and equity% for all partners thereafter.
nice reading 🙂 very informative.
Great article! however, the number in the last table do not seem correct. They should be paid 112 cr so, it leaces 88 cr for founders + esop + other investors… am I missing something?