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So the Series A investors would essentially be cashing out the BOOST investors? I don't think any Series A investor would go for this. They want to see all th

by jwb119 13y ago

So the Series A investors would essentially be cashing out the BOOST investors? I don't think any Series A investor would go for this. They want to see all the money go into company growth at that stage.

ChuckMcM 13y ago
"So the Series A investors would essentially be cashing out the BOOST investors?" Yes. But lets look at it from a couple of different perspectives before we conclude they won't like that. First we'll assume that the Series A is much larger than the BOOST redemption cost, anywhere from about 10x to 20x. We make that assumption because it the BOOST aka "seed" round is much bigger than that the Series A looks more like a Series B than a Series A, which is to say the company valuation isn't really in a place where VCs would jump in ok? Lets put some numbers down which makes talking about it easier. Lets say the Series A really is 9X the BOOST so in a post money valuation with 60 percent for the company founders/employees we're looking at a cap table that is versus 60% employee 60% Employee 36% VC 40% VC 4% BOOST 0% BOOST So in the left scenario everyone stays in, and in the right hand scenario the Series A investor has effectively "bought out" the BOOST investor. (the money flow is different but the effect is the same). Lets assume that value post money was $5M. Company value increases 5x and the company is sold for $25M. Series A guy in the left scenario gets their liquidation preference + 36% of the remains (with participation) whereas in the right scenario they get their liquidation preference + 40% of the remains (again with participation) in the second scenario. If the company is going to do well (and they assume it will) they do better by not having the BOOST guys in the cap table then they do with them there taking a percentage. If the company does poorly they still lose their same investment they would have lost anyway. Things are simpler for the BOOST guy too, instead of managing dozens of small share holdings in small companies they get a smaller but faster return. This creates a reliable source of seed money for the ideas, which creates a larger pool of potential Series A investments for VC companies.

by jwb119 13y ago

ChuckMcM 13y ago

"So the Series A investors would essentially be cashing out the BOOST investors?" Yes. But lets look at it from a couple of different perspectives before we conclude they won't like that. First we'll assume that the Series A is much larger than the BOOST redemption cost, anywhere from about 10x to 20x. We make that assumption because it the BOOST aka "seed" round is much bigger than that the Series A looks more like a Series B than a Series A, which is to say the company valuation isn't really in a place where VCs would jump in ok? Lets put some numbers down which makes talking about it easier. Lets say the Series A really is 9X the BOOST so in a post money valuation with 60 percent for the company founders/employees we're looking at a cap table that is versus 60% employee 60% Employee 36% VC 40% VC 4% BOOST 0% BOOST So in the left scenario everyone stays in, and in the right hand scenario the Series A investor has effectively "bought out" the BOOST investor. (the money flow is different but the effect is the same). Lets assume that value post money was $5M. Company value increases 5x and the company is sold for $25M. Series A guy in the left scenario gets their liquidation preference + 36% of the remains (with participation) whereas in the right scenario they get their liquidation preference + 40% of the remains (again with participation) in the second scenario. If the company is going to do well (and they assume it will) they do better by not having the BOOST guys in the cap table then they do with them there taking a percentage. If the company does poorly they still lose their same investment they would have lost anyway. Things are simpler for the BOOST guy too, instead of managing dozens of small share holdings in small companies they get a smaller but faster return. This creates a reliable source of seed money for the ideas, which creates a larger pool of potential Series A investments for VC companies.