
Show HN: Venture Dealr – Visualize and turn the knobs on VC financing concepts - floatrock
https://dlopuch.github.io/venture-dealr
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SeoxyS
The section about "Underwater Options" is describing what would happen
assuming a _Participating_ Liquidation Preference. It's a little misleading,
because the vast majority of liquidation preferences nowadays are _non-
participating_. It's an important distinction.

A 1x non-participating preference means that before anyone is paid out, the
investors get their money back. The remainder, if any, is distributed pro-rata
to other stockholders. For example, if the investors had put in $25M and owned
50% and the exit was for $30M, the investors would get $25M and the last $5M
would be split between founders and employees.

A 1x participating preference is much worse. It means that the investors are
paid back first, and then still participate in the payout according to their
ownership percentage. In the same example as above ($25M in, $30M exit, 50%
ownership), the investors take their $25M back, then the last $5M is split
between the founders and employees _and investors_. Thus, the investors get a
full $27.5M and the common stock holders see their payout decrease by another
50% vs a non-participating preference.

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StavrosK
Why would the money of the preference not be counted as a payout floor? So, if
you and I own a company 50-50, and you have a 1x preference for $25M:

* If we exit for $25M, you get all of it.

* If we exit for $25-50M, you get 25, I get the remainder, up to 50 (because we're 50-50 and the minimum for you is 25).

* If we exit for any more than 50, we split it in half.

Does that not make more sense?

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SeoxyS
Right, that's what a non-participating preference is. The first example I
gave. Luckily, that's how most preferences work these days.

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floatrock
Thanks for the clarification, something I'll have to add.

Out of curiosity, how does it work across multiple rounds? I implemented 1x
participatory preferences as a simple lifo queue... For non-participatory
preferences, are there any complications in calculating the "everybody goes
equal from here up" point (50 in the above example) when everyone got in at a
different round? Can you have some participatory preferences mixed with non-
participatory ones? Is there a good reference for that (at least for a typical
case)? Or is this a "call your lawyer" thing?

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SeoxyS
A preference is just a term on the investment. They could be mixed. It can get
pretty complicated.

Take this scenario: (A) Series A non-participating 5M, (B) Series B non-
participating 10M, (C) Series C participating 10M, owns 25%. Founders own 50%,
no options pool. Company sells for 30M.

    
    
        - C gets 10M first
        - B gets 10M next
        - A gets 5M next
        - 5M left over, only C is participating; A & B are just floors.
        - Pro-rata, remaining ownerships ratio of 50:25 = 2:1.
        - 5M/3*2 = 3.33M goes to founders.
        - 5M/3*1 = 1.67M goes to Series C investors.
    

Total tallies:

    
    
        - Founder:  3.33M.
        - Series A: 5M.     ROI: 0%
        - Series B: 10M.    ROI: 0%
        - Series C: 11.67M. ROI: 16%
    

This is mostly for intellectual curiosity, though. If you're a startup founder
today… just don't take on any investors who ask for participating preferred.
If you're an investor, don't ask for it, it makes you a vulture.

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tptacek
One of the very rare cases where an infographic outperforms text:

[http://www.bothsidesofthetable.com/2011/10/14/understanding-...](http://www.bothsidesofthetable.com/2011/10/14/understanding-
how-dilution-affects-you-at-a-startup/)

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raymondgh
Awesome page, learning a lot. As someone who never really understood this song
and dance, here's my feedback. I think you should include a more direct
explanation of pre- and post- money valuations. Sure, it's really simple:
Premoney+money=postmoney, but that doesn't mean it's common knowledge. Second,
the explanation of the option pool shuffle is important to understand the
example; it shouldn't be a subtext of an asterisk in the second column. I
would also recommend being more direct with the definition of effective
valuation as well at the time of its introduction.

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raymondgh
It may also be interesting to add levers for duration of time between
financial events. Then we can look at the exit analysis from an investor's
point of view and understand a little bit more about investing at different
stages... then you could add levers for success rates at each stage (Dave
McClure tweeted a visualization of this recently)!

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floatrock
Can you link me to that? Would love to understand better what's important and
what people look for in that sort of analysis.

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raymondgh
[https://twitter.com/davemcclure/status/647824009992626176](https://twitter.com/davemcclure/status/647824009992626176)

If you look at his account around that date, he has a few more tweets on a
similar topic. I don't think it's really necessary to understand your main
topic, but it could be fun :)

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jianshen
I wish more fresh grads and folks new to startups understood these concepts,
particularly around how preferences work and that you can't just multiply # of
shares by strike price given all of these considerations.

Great job on elucidating these concepts!

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floatrock
Agreed. Realizing I didn't know any of this is what started me on this. Pass
the link on next time you meet a fresh grad!

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faizshah
I love this, it really helped me put into perspective the decisions a founder
can make and how it can effect the later stages. I haven't worked in the
startup world and I don't have a very good understanding of business so this
helped put this corporate finance stuff into perspective.

I would love it if you could add other choices like bootstrapping/family and
friends money, accelerators, cofounder issues, and board seats. These kinds of
business issues are really hard for people outside of the startup world to
understand the consequences of, I personally would really find it helpful.
Would make a really good interactive fiction or idle game as well :)

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untilHellbanned
I don't have anything substative to add other than thank you so much for
making such a cool visualization. I found it really helpful!!

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jessaustin
_Their percentage stake is how much they put in relative to the pre-money
valuation._

Directly above this statement is a bar graph that says "investment 20%
equity", while this statement led me to expect it to say "25%". (20% makes
more sense to me, but that would mean s/pre/post/)

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floatrock
You have a 2M slice (money) and an 8M slice (pre valuation). The 2 is
therefore 20%. I guess "relative" is a bit of an imprecise term. Tried to keep
the formulas out of it to make it more approachable, but I'll see if I can be
more precise. Thanks!

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jessaustin
"Relative to" seems plenty precise to me. If you're dividing $2M by X and
getting 20%, X = $10M, which would be "post-money".

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KentLatricia
Great visualization, thanks!

The underwater options is scary. What I wonder though is what happens if the
exercise price is larger than the stake is worth. Since nobody would exercise
their options, would not that money be split over the rest of the stake
holders?

So when the ROI is negative for some parties, it should grow on the other
parties. Isn't that so?

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anilgulecha
These are options and not shares. So I assume the value of unexcercised
options add to the company's issued stock when the options expire.

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babl-yc
This was really well done and fun to interact with. Thanks for sharing.

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rw2
Would love to see a similar infographic for real companies using crunchbase
data

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floatrock
I hear that a lot but you need two numbers: money raised and valuation.
Precise valuation is generally kept secret. Even in an IPO my understanding is
the numbers never make it out into SEC docs or anything. If you know of a
company that has shared this info, would love to see it and tell their story!

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matthewmcg
The valuation of a public company is easy--it's the "market cap." or the
number of outstanding shares times the share price.

The S-1 filing for an IPO has to include a cap. table and the share price is
right on the front page of the S-1.

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floatrock
To figure out the dilutions, we need the valuation at each round. My
understanding is only the IPO valuation is made public, not the per-round
breakdowns.

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matthewmcg
Right, after the IPO everyone is automatically converted to common but for the
history of past rounds you need to look at the charter.

The charter is publicly available from the secretary of state wherever the
corporation is incorporated. It will state how many shares of each series of
preferred stock is authorized. Also, if there is price-based anti-dilution
protection (typical in non-seed investments), the charter will state the
"original issue price" of each series (i.e. the price per share when first
sold). You can check the amount actually sold in the company's SEC Form D
filings (also public) and work out the historical valuation that way.

This doesn't account for things like notes converting at a discount,
milestones, adjustments for down rounds, etc. But it is possible to get a
rough idea of the valuation trajectory.

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pcl
_Best experienced using Chrome_

I'm getting flashbacks to 2000-era HR systems...

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floatrock
Turns out there are still differences in browser svg engines and animation
rendering. Tried to work out most of the quirks :(

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ihaveajob
Really neat visualizations. Is it based on d3.js?

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floatrock
D3 and react, built with webpack. Checkout the source repo!

