UC Capitalization Table & Series Seed Preferred Stock Project

Part 1:
Apurva Mehta was working at Amazon but wanted to leave to create a start-up.
After cycling through a dozen ideas, he came up with the idea of on online grocery service. He developed
the initial software application, ordered some groceries, and for the first order, he went to the grocery store
to pick up the food himself. Instacart was born.
Apurva wanted co-founders to increase his chances of success, so he reached out to a couple of friends –
Fidji Simo and Brandon Leonardo -to start the business with him.
To start the business, Apurva invested $40,000 in cash in exchange for 800,000 shares of common stock,
Fidji and Brandon each invested $20,000 in cash to receive 400,000 shares of common stock each.
Eventually, Apurva, Fidji and Brandon decide to raise capital through a Seed round of financing. They
agree to raise $1.5 million on a $7.5 million post-money valuation from a seed investor named Aileen
Lee through her fund Cowboy Ventures.
a) (i) Record the journal entry (or the balance sheet equation entry) for the initial issuance of common stock
to the co-founders Apurva, Fidji and Brandon.
(ii) Construct the initial capitalization table for Instacart.
b) (i) Record the journal entries for the Series Seed Preferred stock that is issued to Cowboy
Ventures.
(ii) Construct an updated cap table for Instacart for the Series Seed financing round.
(iii) What is the pre and post-money valuation for Instacart in the Series Seed round.
(iv) What is the price per share of the Seed financing round?
(v) What percent of the company do the founders collectively continue to own as common stock after the
Seed financing round has been closed?
Things continue to go very well for Instacart and the company is able to raise a Series A round of financing.
Assume the company signs a term sheet to raise $8.0 million on a $32.0 million pre-money valuation to be
led by the VC firm Sequoia Capital. Additionally, the company agrees to set-up an employee option pool
that is equal to 12% of the fully diluted shares after the financing. Prior to this point, the company did not
have an employee option pool. Assume that Sequoia invests $7M of the round and Cowboy Ventures invests
$1M of the round, totaling $8M in new capital.
c) (i) Record the journal entries for equity issued to Sequoia and Cowboy Ventures. The equity will
be called Series A Preferred stock.
(ii) Construct an updated cap table for Instacart for the Series A round.
(iii) What percent of equity is issued to the new venture capital firm?
(iv) What is the price per share after the Series A round?
(v) What percent of the company do the founders each now own after the Series A financing round?
(vi) How much overall dilution have the founders suffered since founding the company?
(vii) What % of the company does Cowboy Ventures own after this financing round? Explain why their
ownership increased or decreased after this financing round.
Part 2
Negotiating the size of the option pool. Assume that while the founders are negotiating the terms for the
Series A financing, it wants to explore the impact of negotiating a smaller option pool, which is 9%
instead of 12%. As before, Sequoia invests $7M and Cowboy Ventures invests $1M.
a) (i) Construct an alternative cap table assuming that the unallocated option pool is set at 9%
instead of 12%, assuming no other changes to the terms of the deal (i.e. the investment and premoney valuation remain the same)
(ii) What is the new price per share? Is this higher or lower than under the 12% option pool?
(iii) What impact does the new option pool size have on each of the founder’s ownership
percentages?
(iv) What impact does it have on the ownership percentage of the VC firm, Sequoia? Is this better or worse
for Sequoia relative to an option pool of 12%?
(v) What impact does it have on the ownership percentage of the seed investor, Cowboy Ventures?
Negotiating the valuation. Next, instead assume that the founders want to model the impact of a change
in valuation. Assume that the pre-money valuation is increased from $32.0 million to $36.0 million
assuming no other changes to the original terms of the deal (i.e. the size of the option pool is still 12% and
the investment amounts remain unchanged).
b) (i) Construct an alternative cap table assuming a pre-money valuation of $36.0 million, with the option
pool set at 12%.
(ii) What is the new price per share? Is this higher or lower than under the $32.0 million valuation?
(iii) What impact does the new valuation have on each of the founder’s ownership percentages?
(iv) What impact does it have on the ownership percentage of the VC firm, Sequoia? Is this better or worse
for Sequoia?
(v) What impact does it have on the ownership percentage of the seed investor, Cowboy Ventures?
(vi) If the founders could choose either to negotiate a smaller option pool of 9% or negotiate a higher
valuation of $36.0M, which should they choose and why? Is their decision clear-cut?
Negotiating both the option pool and valuation. Instead assume that Instacart is successful as
negotiating to the smaller 9% option pool, and is also successful at increasing the pre-money valuation to
$36.0M. The investment amounts remain the same as before.
c) (i) Construct an alternative cap table assuming a pre-money valuation of $36.0 million, with the
option pool set at 9%.
(ii) What impact does combined higher valuation and smaller option pool have on the ownership
percentage of each of the parties involved (Founders, Cowboy Ventures, and Sequoia)
Part 3:
Instacart continues to thrive, and 12 months later it is able to raise a Series B round of financing. The
company raises $25 million on a $145 million post-money valuation led by the VC firm Andreessen
Horowitz. As part of this financing round, the company agrees to expand the option pool to ensure that 6%
of the total fully diluted shares are available for future issuance after the financing.
Assume that Andreessen Horowitz invests $16M of the round, and Sequoia invests $7M of the round.
Cowboy Ventures invests $2M of the round. Assume that the Series A financing occurred as described
in Part II, Question (c) (i.e. Instacart had raised $8.0 million on a $36.0 million pre-money valuation and
a 9% option pool).
Assume that 59,660 options that were available to be issued in the Series A round have not yet been
allocated to employees, and are therefore available towards the expansion of the option pool for Series B.
a) (i) Construct an updated capitalization table for Instacart projecting this Series B fundraise.
(ii) What is the price per share of the Series B stock that is issued?
(iii) How much does the option pool need to be expanded (in terms of number of shares) in order
to satisfy the 6% option pool requirement for Series B? What percentage of the total fully diluted
shares does this option expansion represent?
(iv) How much does each founder now own of the company?