Instrument
Priced equity rounds
In a priced round investors buy newly issued preferred shares at a set price per share. Everything else in the round flows from how that price is calculated.
In a priced round the company sells newly issued shares, almost always a new series of preferred stock, at a fixed price per share. The price comes from a negotiated valuation. Unlike a SAFE or note, the round sets the company's ownership and governance terms on the day it closes: the preferred stock's rights are written into the company's charter, and side agreements give investors information rights, board seats and vetoes. Series A rounds are priced; many seed rounds are too.
Pre-money, post-money and price per share
Three identities do almost all the work:
post-money valuation = pre-money valuation + new money new investors' ownership = new money ÷ post-money valuation price per share = pre-money valuation ÷ pre-money fully diluted shares
"Fully diluted" means every share that exists or could exist from instruments already promised: common stock, preferred stock, granted options, the unissued option pool, and shares from SAFEs and notes converting in this round. Term sheets normally say explicitly that the pre-money includes the converting SAFEs and notes and the option pool, including any increase. Each of those inclusions lowers the price per share for a given headline valuation, and so shifts value from existing holders to the new investors.
The option pool in the pre-money
New investors usually require an option pool big enough for the hires the round is paying for, sized as a percentage of the company after the round, and created before their money goes in. This is the "option pool shuffle" (named by the Venture Hacks blog in 2007; we reproduce its example on the methodology page).
Example: a company has 9,000,000 founder shares, 400,000 granted options and 100,000 unissued options. It raises $3 million at a $12 million pre-money valuation, and the term sheet requires a 10% available pool after the round.
| Pool topped up in the pre-money | No new pool | |
|---|---|---|
| Pool increase | 1,242,858 | 0 |
| Pre-money fully diluted shares | 10,742,858 | 9,500,000 |
| Price per share | $1.1170 | $1.2632 |
| New investors own | 20.0% | 20.0% |
| Founders own | 67.0% | 75.8% |
The investors get 20% either way. The new pool, worth $1.39 million at the round price, comes entirely out of the existing holders' share, so the effective pre-money valuation is $12 million − $1.39 million = $10.61 million. Negotiating the pool size from a real hiring plan is often worth as much as negotiating the headline valuation. More on the option pool.
SAFEs and notes converting into the round
Outstanding SAFEs and notes convert at the closing. Their shares are counted in the pre-money (they are existing holders' dilution, not the new investors'), so they also lower the price per share. Each converts at whichever of its own cap, discount or the round price gives it the most shares, A post-money SAFE receives a "shadow" sub-series of the preferred whose liquidation preference is based on its own price, so its preference equals the amount it paid rather than its shares times the round price; notes often get a similar treatment, depending on their terms.
The example on our home page shows the whole sequence. Two founders start with 90% (the rest is the option pool). They raise $500,000 on post-money SAFEs at a $6 million cap and $2.5 million at $20 million, then a $10 million Series A at $40 million pre-money with a 10% pool:
| Holder | Shares | Fully diluted |
|---|---|---|
| Founder 1 | 4,500,000 | 26.18% |
| Founder 2 | 4,500,000 | 26.18% |
| Options granted | 400,000 | 2.33% |
| Available option pool | 1,718,797 | 10.00% |
| Pre-seed SAFEs | 1,052,631 | 6.12% |
| Seed SAFEs | 1,578,947 | 9.19% |
| New investors | 3,437,607 | 20.00% |
| Total | 17,187,982 | 100.00% |
| Price per share | $2.9090 | |
What preferred stock adds
The economics of a priced round are not only the price. The preferred stock's rights decide how a sale is split and who controls key decisions. The standard U.S. starting point is the National Venture Capital Association's model documents; most term sheets are variations on them.
| Right | Common early-stage position | Read more |
|---|---|---|
| Liquidation preference | 1x, non-participating: on a sale, investors get the greater of their money back or what their shares would get as common. | Liquidation preference |
| Anti-dilution | Broad-based weighted average adjustment if a later round is priced lower. | Anti-dilution |
| Dividends | Non-cumulative, only if declared; cumulative dividends are unusual at early stage. | Glossary |
| Conversion | Convertible into common at any time; automatically on an IPO or a vote of the preferred. | Glossary |
| Board and protective provisions | Seats allocated between founders, investors and independents; preferred vetoes over specific actions. | Board and control |
| Pro rata rights | Major investors may buy into future rounds to keep their percentage. | Pro rata rights |
| Founder vesting | Investors may ask for founder shares to vest, often crediting time already served. | Founder vesting |
Priced seed or SAFEs?
A priced round costs more in legal fees and time than a stack of SAFEs, and it requires a single coordinated closing. In exchange, everyone knows the ownership and terms immediately, and investors get governance and information rights that SAFEs do not carry. YC's view, in its guide, is that once the post-money SAFE made ownership predictable, the choice comes down to whether the investors need the other rights of a priced round, such as board seats and vetoes. Some lead investors insist on pricing their seed round; many smaller rounds are done on SAFEs.
- Several investors, one of whom sets terms, and enough money to justify the legal cost: a priced round is natural.
- Money arriving in small pieces from many angels over months: SAFEs let each one close when ready.
- A large SAFE stack converting at the Series A concentrates dilution in that round; model it before adding more.
The documents
A U.S. priced round usually involves a term sheet (mostly non-binding), a stock purchase agreement, an amended and restated certificate of incorporation (where the preferred stock's rights live), an investors' rights agreement, a voting agreement, and a right of first refusal and co-sale agreement, plus board and stockholder consents. The closing guide walks through them and the steps after closing, such as the Form D filing.
Sources
- Post-Money Safe User Guide, Y Combinator. Cited for facts; not reproduced.
- Model Legal Documents (term sheet, certificate of incorporation, investors' rights, voting and ROFR/co-sale agreements), National Venture Capital Association. Cited for structure; not reproduced.