
Angel financing - Term sheets (part 2) - paulsb
http://www.startupnorth.ca/2008/04/06/angel-financing-term-sheets-part-2/
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Tichy
"Say for example your company currently has 1,000,000 shares outstanding. You
and the investors settle on a valuation of $1 per share for a pre-money
valuation of $1,000,000. The investors put in $250,000 and in exchange they
are issued 250,000 shares. The post money valuation of the company is
$1,250,000 and investors own 20% of the company."

I have trouble understanding this. Why do they only own 20% of the company, if
they own 25% of the shares?

I guess it is also a complication that the investment actually changes the
value of the company (because it now has 250000$ more)? But wouldn't it make
more sense to conclude that if an $250000 investment buys you 25% of the
company, it is evaluated at 750000$ (before the investment)?

Sorry if I get this completely wrong, I am not used to those calculations.

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rms
The 250,000 new shares are created, not transferred. So there were 1,000,000
shares before the investment and 1,250,000 shares after the investment.

~~~
Tichy
OK, that makes sense ;-)

On the other hand, how can shares simply be created? Is this how people get
"diluted"? Like before this transaction, some other guy owns 10% of the
company, and afterwards suddenly he only owns 8% - how is that possible? By
claiming in theory that his 8% still have the same value in cash? But since
all those are just virtual estimates, not hard transactions, how can you ever
be safe from being screwed over?

