Rickard Vernet discusses essential factors concerning equity distribution in startup financing, particularly the impact of convertible notes on ownership percentages. He illustrates with an example how a new investor might want their ownership to reflect total investment relative to the pre-money valuation plus new investments, hence influencing the price per share calculation. This circular dependency complicates negotiations but emphasizes the need for clarity in agreements to protect existing investors and ensure accurate valuation adjustments as funding rounds unfold.
This new investor will almost certainly ask that their post investment ownership is equal to investment/(pre-money valuation + new investment), or in other words that existing convertibles are included in the pre-money valuation.
To effectuate this, the calculation for the new investor's PPS would therefore instead be: Pre-money valuation/(number of Outstanding shares + conversion shares).
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