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SHAREHOLDER EQUITY DYNAMICS IN STARTUPS




The amount of shares that an investor owns, divided by the total number of existing shares, is the percentage of equity that particular investor owns in the company.
The total number of outstanding shares in the equation above refers to all shares that exist today, including all shares purchased by investors, in addition to all shares likely to exist if a liquidity event were to occur.

 Equity Ownership Percentage = No. of Shares Owned / Total no. of Outstanding Shares

 Events That Can Impact Startup Valuation:
• Company progress (typically leads to an increase to valuation)
• Company challenges (typically leads to flatline or even decrease to valuation)
• Market dynamics
• New priced equity round, acquisition, or IPO

 To calculate the value of an individual investor’s shares in a startup at any given time, multiply the number of shares the investor owns and the company’s current price per share.

Preferred Stock Rights:
Liquidation Preference: This specifying which investors get paid first, and how much they will get paid if a liquidation event occurs. Liquidation preference is typically used to protect preferred investors by making sure they get their initial investments back before common shareholders

 Pro-rata rights: Pro-rata rights help existing investors maintain their percentage of ownership in the company via additional investments. Often, companies will grant larger investors in early rounds of funding the right to participate in subsequent rounds via this right. Investors can decide whether to exercise their pro-rata rights in subsequent rounds of financing depending on their investment strategy.

 Anti-dilution: Shares granted with anti-dilution rights protect early equity investors in the event of a future decrease in the value of their shares. In the event of a down round, anti-dilution rights kick in and issue additional shares to previous investors who invested at a higher valuation. Most, but not all, equity financings led by venture capital investors include anti-dilution rights for preferred investors. However, investors in later rounds may request to waive anti-dilution rights granted to investors in previous rounds.
-Kritika & Kartik 

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