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A couple of notes. One of the partners from CRV called late last week. There was a slight flaw in the calculator (it has since been fixed). The flaw was that the initial amount that CRV puts in (e.g., $100K) is part of their Series A investment. That is, if the Series A is $3 million and CRV puts in 50%, rather than writing a check for $1.5 million, CRV would write a check for $1.5 million minus the $100K + interest.
The CRV partner was extremely helpful in pointing out the error and checking the calculator before it was relaunched.
Regarding taking into account liquidation preferences, participating preferred, option pools, etc., these are good points. I assumed that all preferred converts to common in an exit to make the example fairly straightforward. Adding all of these options may have made the calculator too complex for most entrepreneurs to understand. If anyone has any thoughts on how to add these options in an easy-to-comprehend way, I wouldn't mind taking a shot at modifying the calculator to include them.
Why? Well, representing a percentage implies a time-based value to many of us. A 3X (ROI) could have a 900% IRR or a 10% IRR depending on how long it took to get paid. Your model does not take into account time except for the bridge (rather than for each investment and the ultimate exit), so a cash-on-cash, multiple output is really all you can get out of this model.
Most of the models my colleagues and I use include an option pool data entry cell that maintains a certain percentage from round to round as you typically need to pay management before you can get any liquidity event okay'd.
Lastly, most models also include the anti-dilution calculation (typically weighted average) in case later rounds are at lower valuations. I sometimes find this more important than liquidation preferences, as liq prefs are routinely re-negotiated at each subsequent round. In the event of an exit that cannot satisfy all liq prefs, well, you still have to carve out management, so most bets are off as far as being able to rely on a calculator!
Bottom line, I model each and every financing and potential acquisition offer with a fresh outlook, leveraging most of the formulas I've created in prior spreadsheets, but rarely being able to use a single "stock" model. Sometimes trying to take into account every fork in the decision tree makes the model cumbersome while not having enough forks can make the model not very reliable as a data point.
Understanding the deal points and what really happens to ownership is key. A model can easily give a false sense of security particularly when there is a lack of scrutiny of the term sheet, Purchase Agreement, Articles and Schedule of Exceptions. Ignore those at your peril as no calculator will write you a check if you fail to put all the parameters into it…
Wow that was a mouthful, but I’ve seen too many investment professionals try to do off-the-cuff analysis (or rote modeling) and risk being suckered by bad terms which could significantly reduce the firm’s upside.
The devil is in the details, eh?