Equity Valuation, Cap Tables,�and Deal Terms

FIN143

How financing terms divide ownership, exit proceeds, and decision rights

Devon Coombs CPA, MBA

Santa Clara University | Fall 2026

The same ownership can produce different exit proceeds

Founders own 75%; one preferred investor owns 25% after investing�$5M.

The company sells for $20M available to equity holders. Assume a 1x�preference, no debt, fees, dividends, or other claims.

The founders' proceeds differ by $3.75M.

We will connect the cap table, financing mechanics, exit waterfall, and�negotiated rights.

Cooley: liquidation preference.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

02

A cap table needs a defined denominator

• Authorized shares: the charter's issuance limit for each class;�unissued authorization is not an ownership stake.

• Issued and outstanding: shares actually held by stockholders. An�unexercised option is not an issued share.

• As-converted: preferred and other convertible securities expressed�as common-share equivalents under stated conversion terms.

• Fully diluted: issued shares on an as-converted basis plus the�options, warrants, other convertibles, and ungranted pool included�by the transaction.

Specify the date, included instruments, conversion assumptions, and�pool treatment. Never count the same option twice.

Cooley: issued versus fully diluted.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

03

Read the ownership percentage and its basis

Illustrative cap table: preferred converts 1:1; no SAFEs, notes, warrants, or�other rights.

Founders own 75% of issued shares, but 60% on this fully diluted basis.

The ungranted reserve is a pricing assumption, not a stockholder with�voting rights.

Cooley: issued versus fully diluted.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

04

Knowledge check — Issued and fully diluted ownership

A founder owns 3.6M of 6M issued shares. The agreed fully diluted�count also includes 0.6M granted options and a separate 1.4M�ungranted reserve. Which ownership pair is correct?

A. 60% of issued shares and 60% on the fully diluted basis

B. 45% of issued shares and 45% on the fully diluted basis

C. 60% of issued shares and 45% on the fully diluted basis

D. 45% of issued shares and 60% on the fully diluted basis

E. 60% of issued shares and 54.55% on the fully diluted basis

Cooley: issued versus fully diluted.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

05

W6-S005

143

Medium (4/8)

Answer — Issued and fully diluted ownership

C. 60% of issued shares and 45% on the fully diluted basis

Why: Issued ownership is 3.6M / 6M = 60%. Fully diluted ownership is�3.6M / 8M = 45%.

Other choices: A ignores both option categories. B uses the fully�diluted denominator twice. D reverses the bases. E includes granted�options but omits the ungranted reserve.

Takeaway: Reconcile the included share categories before calculating�the percentage.

Cooley: issued versus fully diluted.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

06

W6-S005

143

Medium (4/8)

Use the share count that matches the valuation

Implied financing price = agreed equity valuation / agreed pricing�share count

For pre-money pricing, divide the pre-money value by the pre-money�capitalization defined in the financing.

Match the valuation date, share basis, and included instruments.

This arithmetic does not establish that common and preferred shares�have identical fair values. Their rights can differ.

Cooley: issued versus fully diluted; Cooley: pricing a round with convertibles.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

07

Knowledge check — Financing price and share count

Assumptions: The pricing model has 6M issued shares plus 2M�included option rights and reserve shares. Total authorization is 10M.�Use the stated fully diluted pricing basis.

A company is worth $12 million in equity value and has 8 million fully�diluted shares. What is the per-share price?

A. $0.67

B. $2.00

C. $1.20

D. $1.50

E. $6.00

Illustrative inputs. Calculations follow the stated assumptions.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

08

W6-S008

143

Medium (3/8)

Answer — Financing price and share count

D. $1.50

Why: The pricing basis is 8M fully diluted shares. $12M / 8M = $1.50.

Other choices: A reverses numerator and denominator. B omits 2M�included rights. C counts authorization beyond the agreed�capitalization. E omits issued shares.

Takeaway: A financing price uses the capitalization agreed for that�valuation.

Illustrative inputs. Calculations follow the stated assumptions.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

09

W6-S008

143

Medium (3/8)

Pre-money, post-money, and the new investor's stake

In a simple primary financing:

Post-money valuation = pre-money valuation + new cash invested

New investor ownership = new cash / post-money valuation

The denominator includes the new money because ownership is�measured after the financing.

This shortcut assumes the negotiated capitalization is already�reconciled. Convertibles, pool changes, and secondary sales require�separate treatment.

Cooley: pricing a round with convertibles.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

10

Question: Issued and fully diluted ownership

KNOWLEDGE CHECK

Before a financing, a company has the following capitalization:

The charter authorizes 20 million shares. The parties price a $5 million primary�investment at a $20 million pre-money valuation using all five rows in the fully diluted�denominator. Count each instrument at its stated share amount. Ignore any cash the�company could receive from exercising options or warrants; do not reduce their share�counts for such proceeds.

No existing instrument is exercised or converted at closing, and no pool change�occurs. New investors receive newly issued shares, each representing one�common-equivalent share. For issued ownership, use common-equivalent issued�shares only.

What are the price per new share and the founders' post-financing fully diluted and�issued ownership percentages?

A. Price: $2.50;�founder ownership:�50.00% fully diluted�and 60.00% issued.

B. Price: $1.00;�founder ownership:�24.00% fully diluted�and 46.15% issued.

C. Price: $2.00;�founder ownership:�57.14% fully diluted�and 48.00% issued.

D. Price: $2.00;�founder ownership:�48.00% fully diluted�and 57.14% issued.

E. Price: $2.00;�founder ownership:�60.00% fully diluted�and 75.00% issued.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

11

W6-S011

143

Hard (7/8)

Answer: Issued and fully diluted ownership

KNOWLEDGE CHECK

D. Price: $2.00; founder ownership: 48.00% fully diluted and 57.14% issued.

Work the calculation

Pre-financing fully diluted shares = 6 + 2 + 0.75 +�0.75 + 0.5 = 10 million. Price = $20 million / 10�million = $2.00. New shares = $5 million / $2 = 2.5�million.

Issued common-equivalent shares after�closing = 6 + 2 + 2.5 = 10.5 million. Founder�issued ownership = 6/10.5 = 57.14%.�Authorized but unissued capacity is not an�additional owner. The reserve is included�only in the agreed fully diluted convention.

Why the other choices are wrong

A. Prices the financing using only the 8�million issued shares, excluding the agreed�options, reserve, and warrants.

B. Treats all 20 million authorized shares as�existing fully diluted ownership.

C. Reverses the issued and fully diluted�ownership denominators.

E. Reports the founders’ pre-financing�percentages and ignores the new shares.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

12

W6-S011

143

Hard (7/8)

Preferred stock separates economic and control rights

Common and preferred can differ in liquidation priority, conversion�rights, voting rights, and board representation.

Kaplan and Strömberg (2003): convertible preferred appeared in 204�of 213 financings in their historical U.S. venture sample.

Their central finding: contracts allocate cash-flow, board, voting, and�liquidation rights separately.

The study helps explain why a single ownership percentage cannot�describe the whole deal. It is not a current market-share estimate or�proof of a single cause.

Kaplan & Strömberg (2003), published abstract; Philadelphia Fed: the study's 204/213 finding.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

13

Knowledge check — Ownership and board rights

Founders own 70% of the�shares. They designate�two directors, investors�designate two, and one is�independent. A budget�requires three of five�director votes and no�separate stockholder�consent. The founder�nominees vote yes and�investor nominees vote�no. Which conclusion�follows?

A. The independent director's vote determines�whether the budget has enough board support.

B. The founders' 70% ownership supplies�majority approval despite the split among�directors.

C. The two investor votes block approval even if�the independent director votes yes.

D. The budget must go to stockholders�because founder and investor nominees are�tied.

E. The independent director may vote only after�each stockholder group approves the budget.

Kaplan & Strömberg (2003), published abstract; Cooley's Series Seed investment agreement.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

14

W6-S014

143

Medium (4/8)

Answer — Ownership and board rights

A. The independent director's vote determines whether the budget�has enough board support.

Why: The budget needs three director votes. The two affirmative�votes need one more. The founders' economic ownership does not�supply an additional board vote.

Other choices: B substitutes equity ownership for board votes. C�invents an investor veto. D adds a stockholder vote. E adds a�prerequisite to the independent director's vote.

Takeaway: A majority economic stake need not provide a majority of�board votes.

Kaplan & Strömberg (2003), published abstract; Cooley's Series Seed investment agreement.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

15

W6-S014

143

Medium (4/8)

Start the equity waterfall with proceeds available to equity

First reconcile sale consideration to proceeds available to equity after debt�repayment, fees, and other applicable claims.

Then apply the equity contracts:

1. Pay preferred claims according to their negotiated priority.

2. Apply participation, caps, and conversion choices.

3. Allocate the residual to common and any participating holders.

Preferred series may be senior, junior, or pari passu — equal in priority. The�charter sets priority. For equally ranked claims, it can require allocation in�proportion to each claim when cash is insufficient.

Debt ranking depends on liens, subordination, and applicable law; this is an�equity-payoff model, not a universal insolvency ranking.

Cooley: liquidation preference; NVCA: model financing documents.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

16

Knowledge check — Two preferred series

Assumptions: No debt, fees, dividends, or other claims. Series B closed�after Series A.

Series A has a $2M preference claim and Series B a $1M claim. Both stay�preferred. The charter ranks them equally and allocates insufficient�proceeds in proportion to their preference claims. How should $2.4M�available to equity be allocated?

A. Series A receives $2.0M and Series B receives $0.4M.

B. Series A receives $1.4M and Series B receives $1.0M.

C. Series A receives $1.2M and Series B receives $1.2M.

D. Series A receives $1.6M and Series B receives $0.8M.

E. Series A receives $2.0M and Series B receives $1.0M.

Cooley: liquidation preference; NVCA: model financing documents.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

17

W6-S017

143

Medium (4/8)

Answer — Two preferred series

D. Series A receives $1.6M and Series B receives $0.8M.

Why: The claims total $3M. Series A receives two-thirds of $2.4M and�Series B one-third, producing $1.6M and $0.8M.

Other choices: A gives Series A priority. B gives Series B priority. C�mistakes equal priority for equal dollars. E pays more than the available�proceeds.

Takeaway: Equal priority follows the contractual allocation rule when�proceeds are insufficient.

Cooley: liquidation preference; NVCA: model financing documents.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

18

W6-S017

143

Medium (4/8)

Three preference structures, three payoff rules

A 1x preference normally refers to one times the relevant invested�amount or original issue price specified in the documents.

Holding other terms fixed, participation can reduce common proceeds.�At very low exits, different structures can produce the same payout.

Cooley: liquidation preference.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

19

Knowledge check — Participation and common proceeds

Assumptions: Compare�ordinary uncapped�participating and�nonparticipating preferred�with the same investment,�ownership, and 1x�preference.

How does participating�preferred differ from�nonparticipating preferred�for the common holders?

A. Participating preferred receives only its�ownership percentage of the total exit.

B. Participating preferred takes its�preference instead of sharing any remaining�proceeds.

C. Participating preferred shares the residual�after common first recovers invested capital.

D. Participating preferred increases its�preference automatically when the next�valuation rises.

E. Participating preferred receives its�preference and then shares the remaining�proceeds.

Cooley: liquidation preference.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

20

W6-S020

143

Easy (0/8)

Answer — Participation and common proceeds

E. Participating preferred receives its preference and then shares�the remaining proceeds.

Why: The investor receives the preference and then its agreed share�of the residual. Nonparticipating preferred instead compares�preference with conversion.

Other choices: A describes conversion alone. B describes the�preference-only route. C reverses priority. D invents an automatic�preference adjustment.

Takeaway: Participation determines whether the investor also shares�the residual.

Cooley: liquidation preference.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

21

W6-S020

143

Easy (0/8)

Build the participating waterfall in three steps

For one uncapped participating investor:

1. Pay the preference: up to the amount available to equity.

2. Split the remainder: use the investor's as-converted percentage.

3. Reconcile: investor proceeds + common proceeds must equal total�distributable equity proceeds.

If equity proceeds X cover preference P and the investor's fraction is f:

Investor = P + f × (X − P)

Common = (1 − f) × (X − P)

If X is below P, the preferred investor receives X and common receives�zero.

Cooley: liquidation preference.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

22

Knowledge check — Participating exit proceeds

Assumptions: The $20M is available to equity after other claims. One�preferred series, uncapped participation, common owns the remaining�75%, and no dividends.

A $5M investor holds 25% via 1x participating preferred. At a $20M�exit, what do common holders receive?

A. $15.00M

B. $10.00M

C. $11.25M

D. $8.75M

E. $3.75M

Cooley: liquidation preference.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

23

W6-S023

143

Medium (4/8)

Answer — Participating exit proceeds

C. $11.25M

Why: The investor first receives $5M.�Common receives 75% × ($20M − $5M) = $11.25M. Investor proceeds�are $8.75M, so the payout reconciles to $20M.

Other choices: A ignores participation. B applies participation to�proceeds before deducting the preference. D reports the wrong�holder's total. E uses the investor's residual percentage.

Takeaway: Allocate the residual only after paying the preference.

Cooley: liquidation preference.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

24

W6-S023

143

Medium (4/8)

A participation cap creates a flat region,�not a permanent ceiling

Illustration: $5M invested; 25% as-converted ownership; 1x preference;�2x total participation cap = $10M. Conversion remains optional. No�other claims.

At $40M, 25% conversion equals the $10M cap.�Above $40M, conversion wins.

Cooley: liquidation preference.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

25

Question: Capped participating preferred

KNOWLEDGE CHECK

An investor paid $4 million for preferred shares�representing 25% ownership on an as-converted basis.�The shares have a 1× participating liquidation�preference, with total proceeds under the preferred�payout capped at 2× the original investment.

After the investor receives its initial preference, it�participates in the remaining proceeds at 25% until the�total payout cap is reached. The investor may instead�convert fully to common and receive 25% of the entire�equity distribution; the participation cap does not apply�after conversion.

Consider two independent exits: one leaves $20 million�available to equity and the other leaves $44 million.�Both amounts are after debt, transaction costs, and all�other claims. There are no other preferred securities.

What payout will the investor elect at each exit?

A. At the $20 million exit:�$8.00 million; at the $44�million exit: $8.00 million.

B. At the $20 million exit:�$8.00 million; at the $44�million exit: $14.00 million.

C. At the $20 million exit:�$5.00 million; at the $44�million exit: $11.00 million.

D. At the $20 million exit:�$5.00 million; at the $44�million exit: $14.00 million.

E. At the $20 million exit:�$8.00 million; at the $44�million exit: $11.00 million.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

26

W6-S026

143

Hard (6/8)

Answer: Capped participating preferred

KNOWLEDGE CHECK

E. At the $20 million exit: $8.00 million; at the $44 million exit: $11.00 million.

Work the calculation

The preferred payout is the lesser of $4 million�+ 25% × (equity proceeds − $4 million) and the�$8 million total cap, when enough proceeds�exist to pay the initial preference. Compare that�payout with conversion in each scenario.

The investor keeps the preferred payout at the�smaller exit and converts at the larger exit.

Why the other choices are wrong

A. Treats the participation cap as limiting�proceeds even after optional conversion.

B. Ignores the cap and uses uncapped�participation at the larger exit.

C. Converts at both exits even though the�preferred payout is better at the smaller exit.

D. Converts prematurely at the smaller exit and�uses uncapped participation at the larger exit,�instead of comparing the permitted capped�payout with conversion in each case.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

27

W6-S026

143

Hard (6/8)

Notes and SAFEs defer the share calculation

A note's security and priority depend on its terms. A SAFE is not a stock�certificate when signed.

For either instrument, identify the conversion trigger, converting amount,�cap or discount, capitalization definition, and resulting share rights.

A valuation cap sets a conversion-price limit; it does not guarantee the�company's current value or an investor's return.

Y Combinator: SAFE documents and terms; Cooley: pricing a round with convertibles; Cooley: valuation caps and preference overhang.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

28

Knowledge check — A delayed priced round

A company issued a convertible note and an unmodified YC post-money SAFE.�The note reaches its contractual maturity before the next priced financing. Which�assessment is correct?

A. Both instruments require repayment once the next priced financing is�delayed beyond note maturity.

B. Both instruments extend automatically until the company completes its next�priced equity financing.

C. Only the SAFE accrues interest while the company waits for another priced�financing.

D. Both instruments automatically convert at their caps when the note reaches�contractual maturity.

E. The note's maturity terms need review. The SAFE has no maturity deadline.

Y Combinator: SAFE documents and terms; Cooley: pricing a round with convertibles.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

29

W6-S029

143

Easy (1/8)

Answer — A delayed priced round

E. The note's maturity terms need review.�The SAFE has no maturity deadline.

Why: The note is debt with contractual maturity provisions. The�standard YC SAFE has no maturity date. Repayment, extension, or�conversion of the note depends on its terms and any agreement.

Other choices: A gives the SAFE a debt deadline. B assumes an�automatic extension. C assigns interest to the SAFE. D assumes a�conversion event the facts do not provide.

Takeaway: Deferring a priced round�affects different instruments differently.

Y Combinator: SAFE documents and terms; Cooley: pricing a round with convertibles.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

30

W6-S029

143

Easy (1/8)

A cap and a discount are alternative prices�when the contract says so

Illustrative note: $540K converts; no other adjustment.

The agreement uses the lower of:

• Discount price: $2.00 new-round price × (1 − 25%) = $1.50.

• Cap price: $1.20, calculated under the note's defined capitalization.

Conversion price = $1.20

Shares issued = $540K / $1.20 = 450,000

Do not apply the discount again to the cap price unless the contract�expressly requires it.

Cooley: pricing a round with convertibles; Cooley: valuation caps and preference overhang.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

31

Knowledge check — Cap versus discount

A note uses the lower of its cap price and discounted round price. The�new-round price is $2.00, the discount is 25%, and the cap price is�$1.80. Which conversion price follows the agreement?

A. $1.80

B. $1.65

C. $1.35

D. $2.00

E. $1.50

Cooley: pricing a round with convertibles; Cooley: valuation caps and preference overhang.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

32

W6-S032

143

Medium (3/8)

Answer — Cap versus discount

E. $1.50

Why: The discount price is $2.00 × 75% = $1.50, below the $1.80 cap�price.

Other choices: A assumes the cap always wins. B invents averaging. C�stacks alternative terms. D ignores both negotiated protections.

Takeaway: Either the cap price or discount price can govern,�depending on the numbers.

Cooley: pricing a round with convertibles; Cooley: valuation caps and preference overhang.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

33

W6-S032

143

Medium (3/8)

Post-money SAFE ownership is measured�before new-round dilution

For YC-style post-money valuation-cap SAFEs when the cap price�governs:

Ownership sold before new financing and a pool increase�≈ SAFE investment / post-money cap

Two $500K SAFEs at a $10M cap each represent 5% on that basis:�together 10%.

Adding the second SAFE reduces the current stockholders' share; it does�not reduce the first SAFE's 5% at this measurement point.

Later priced-round cash and a new or increased option pool can dilute both�SAFE holders. A sufficiently low priced round can make a different�conversion price govern.

Y Combinator: SAFE documents and terms; Y Combinator: post-money SAFE mechanics.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

34

Knowledge check — SAFE financing sequence

A company issues a second YC-style post-money valuation-cap SAFE and later�raises a priced equity round. The cap price governs both SAFEs, and the option�pool does not change. Which sequence correctly describes dilution?

A. The later SAFE dilutes earlier SAFEs. The priced round dilutes only founders.

B. The later SAFE dilutes current stockholders. The priced round dilutes both�SAFE holders.

C. Both steps dilute only current stockholders because the SAFE ownership�percentages remain fixed.

D. Both steps dilute founders and existing SAFE holders proportionately from�their previous stakes.

E. The later SAFE leaves all modeled ownership unchanged until the priced�round occurs.

Y Combinator: SAFE documents and terms; Y Combinator: post-money SAFE mechanics.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

35

W6-S035

143

Medium (4/8)

Answer — SAFE financing sequence

B. The later SAFE dilutes current stockholders. The priced round�dilutes both SAFE holders.

Why: Post-money cap SAFE stakes are additive before the new round.�The new cash then expands the capitalization and dilutes converted�SAFE holders along with existing holders.

Other choices: A and D incorrectly impose SAFE-to-SAFE dilution. C�treats the pre-round SAFE percentage as permanent. E ignores the�additional claim created by issuing the SAFE.

Takeaway: Specify the event and the measurement point when�describing SAFE dilution.

Y Combinator: SAFE documents and terms; Y Combinator: post-money SAFE mechanics.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

36

W6-S035

143

Medium (4/8)

SAFE conversion, new cash, and a later pool

Illustrative contract sequence: cap prices govern, both post-money SAFEs share the�same conversion capitalization, and no other securities or pool exist. SAFE A�represents 12% and SAFE B represents 8% before new-round dilution.

A priced investor then receives 25% of the company. Afterward, a new pool becomes�10% of final fully diluted shares and dilutes every existing holder.

Multiply prior holders by 75% at the financing, then by 90% at the pool creation.�Post-money SAFE ownership is measured before these later dilution events. Different�pool-pricing terms require a different sequence.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

37

Question: Post-money SAFEs

KNOWLEDGE CHECK

Founders initially own all of a company's shares. It then issues two post-money SAFEs:

• SAFE A: $600,000 invested at a $6 million post-money valuation cap.

• SAFE B: $400,000 invested at an $8 million post-money valuation cap.

Both SAFEs convert at their valuation caps. The share count used to apply each cap includes shares�from both SAFE conversions, but excludes the new priced-round shares and the later option�reserve. Neither SAFE has a discount or interest. No other securities or option reserve exist before�these transactions.

The priced-round investor then receives newly issued shares representing 20% of the company�immediately after that investment. Afterward, a new option reserve is created equal to 10% of the�final fully diluted capitalization, diluting every then-existing holder proportionately.

What are the founders', SAFE A's, and SAFE B's final fully diluted ownership percentages?

A. Founders: 61.20%; SAFE A: 7.20%; SAFE B: 3.60%.

B. Founders: 68.00%; SAFE A: 8.00%; SAFE B: 4.00%.

C. Founders: 59.50%; SAFE A: 7.00%; SAFE B: 3.50%.

D. Founders: 62.61%; SAFE A: 6.26%; SAFE B: 3.13%.

E. Founders: 61.20%; SAFE A: 10.00%; SAFE B: 5.00%.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

38

W6-S038

143

Hard (7/8)

Answer: Post-money SAFEs

KNOWLEDGE CHECK

A. Founders: 61.20%; SAFE A: 7.20%;�SAFE B: 3.60%.

Work the calculation

After SAFE conversion, SAFE A owns $0.6/$6 = 10%, SAFE B�owns $0.4/$8 = 5%, and founders own 85%.

The priced financing leaves earlier holders with 80% of their�prior stakes. The subsequent pool leaves every then-existing�holder with 90% of its prior stake.

The question specifies a pool created after the priced round. A�pre-money pool requirement would be a different transaction.

Why the other choices are wrong

B. Accounts for the priced round but�ignores the subsequent option reserve.

C. Subtracts the 20% financing and 10%�pool percentages instead of applying�dilution sequentially.

D. Treats both caps as pre-money values�on a fixed original share base, producing�pre-financing stakes of 1/1.15, 0.10/1.15,�and 0.05/1.15 instead of the stated�post-money ownership.

E. Dilutes founders but incorrectly�protects the SAFEs from later financing�and pool dilution.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

39

W6-S038

143

Hard (7/8)

Define what is fixed when a note converts

Illustrative inputs supplied for this comparison:

• Founders: 1M shares; no options or other securities.

• Headline pre-money valuation: $9M.

• New cash: $3M.

• Note: $1M principal plus 8% simple interest for one year = $1.08M.

• Conversion: 25% discount to the new-money share price; no cap.

Fixed pre-money price: set new-money price from $9M / 1M existing�shares; issue note shares in addition.

Fixed new-investor ownership: preserve the new investor's�$3M / $12M = 25% stake; solve a lower price that includes note conversion.

Cooley: pricing a round with convertibles.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

40

The capitalization convention changes the split

Illustration: 1M founder shares; $9M headline pre-money; $3M new cash;�$1.08M note converting at a 25% discount; no other securities.

The second convention preserves the new investor's 25%, so founders absorb�more dilution.

Rounded percentages can differ from 100% by 0.01 percentage point.

Cooley: pricing a round with convertibles.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

41

How the $7.56 price produces 63% founder ownership

Illustration: 1M founder shares, $9M headline pre-money, $3M new cash,�and a $1.08M note converting at a 25% discount. No other securities.

Fix the new investor's ownership at $3M / $12M = 25%.

Let p be the new-money price. The discounted note represents�$1.08M / 75% = $1.44M at that price.

The $12M total therefore equals 1M × p + $1.44M + $3M.

p = ($9M − $1.44M) / 1M = $7.56

New investor: $3M / $7.56 ≈ 396,825 shares.

Note: $1.08M / ($7.56 × 75%) ≈ 190,476 shares.

Founders: 1M / (1M + 396,825 + 190,476) = 63.00%

Cooley: pricing a round with convertibles. Illustrative contract terms and calculations.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

42

Question: Convertible-note conversion

KNOWLEDGE CHECK

A company has 4 million founder shares and 1 million seed-investor�shares, all on a 1:1 common-equivalent basis. It has no options,�warrants, or other convertibles except the note described below.

A financing raises $3 million at a fixed price of $3.00 per share. The�price was negotiated using a $15 million valuation of the existing 5�million shares and excludes the converting note; it will not be�recalculated after conversion.

At closing, the note has been outstanding for 18 months. It has�$900,000 principal and accrues 8% annual simple interest; no interest�has been paid in cash. Principal and accrued interest both convert at�the lower of:

• A 20% discount to the financing price; or

• A $10 million valuation cap divided by the existing 5 million shares.

The discount is not applied again to the cap price. All newly issued and�converting shares count one-for-one as common-equivalent shares.

How many shares does the note receive, and what is the founders'�ownership percentage immediately after both the note conversion�and the new investment?

A. Note conversion:�450,000 shares; founder�ownership: 62.02%.

B. Note conversion:�504,000 shares; founder�ownership: 61.50%.

C. Note conversion:�420,000 shares; founder�ownership: 62.31%.

D. Note conversion:�630,000 shares; founder�ownership: 60.33%.

E. Note conversion:�486,000 shares; founder�ownership: 61.67%.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

43

W6-S043

143

Hard (7/8)

Answer: Convertible-note conversion

KNOWLEDGE CHECK

B. Note conversion: 504,000 shares; founder ownership: 61.50%.

Work the calculation

Accrued interest = $900,000 × 8% × 1.5 = $108,000.�Converting claim = $1,008,000.

Discount price = $3 × 80% = $2.40. Cap price = $10�million / 5 million = $2.00. The lower price governs,�producing 504,000 note shares. New-money shares =�$3 million / $3 = 1 million.

The fixed share-price convention�makes this calculation determinate.�A different contractual�capitalization definition could�produce a different cap table.

Why the other choices are wrong

A. Converts principal only and omits�accrued interest.

C. Uses the discount price even�though the cap price is lower.

D. Applies the discount a second�time to the cap price.

E. Accrues interest for only one year�rather than 18 months.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

44

W6-S043

143

Hard (7/8)

Preference overhang: a worked example

Illustration: $400K original note principal plus $20K interest creates a�$420K converting balance.

At a $1.40 conversion price:

$420K / $1.40 = 300,000 shares

If each share receives a contractual $2.00 preference:

300,000 × $2.00 = $600K total preference

That equals 1.50x original cash or 1.43x the converting balance.

The extra preference comes from issuing discounted shares with a�higher preference per share.

Cooley: valuation caps and preference overhang.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

45

Knowledge check — Preference amount and denominator

Assumptions: The note contains $500K original principal and $40K accrued�interest. Measure the effective preference multiple against original cash�invested.

A $500K note converts to 360,000 shares priced at $1.50, but those shares�carry a $2.00 liquidation preference. What is the effective preference�multiple?

A. 1.08x

B. 0.75x

C. 2.00x

D. 1.33x

E. 1.44x

Cooley: valuation caps and preference overhang.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

46

W6-S046

143

Medium (3/8)

Answer — Preference amount and denominator

E. 1.44x

Why: Preference equals 360,000 × $2.00 = $720K. Against original�cash, $720K / $500K = 1.44x.

Other choices: A measures growth in the note balance. B compares�two share prices. C confuses a per-share dollar amount with a�multiple. D uses the converting balance rather than original cash.

Takeaway: A multiple needs both the correct claim and an explicit�denominator.

Cooley: valuation caps and preference overhang.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

47

W6-S046

143

Medium (3/8)

Share count and preference dollars

A negotiated shadow series can retain the conversion share count�while using a different preference per share.

Illustration: 300,000 shares at a $1.40 preference create $420K of�total preference, compared with $600K at $2.00.

The lower per-share preference aligns the aggregate claim with the�$420K converting balance, including interest.

The agreement must specify the aggregate claim, per-share�preference, and conversion rights.

Cooley: valuation caps and preference overhang; Y Combinator: post-money SAFE mechanics.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

48

Knowledge check — Conversion terms and preference

Founders want to preserve a note holder's agreed conversion share count but limit�its aggregate liquidation preference to the converting balance. Which negotiated�term accomplishes both?

A. Set preference per share equal to the converting balance divided by�converted shares.

B. Reduce converted shares until their full-price preference equals the�converting balance.

C. Keep the full-price preference and cap the investor's later common�conversion proceeds.

D. Use the original cash principal as the denominator when reporting the�preference.

E. Keep the full-price preference but remove participation in the remaining exit�proceeds.

Cooley: valuation caps and preference overhang; Y Combinator: post-money SAFE mechanics.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

49

W6-S049

143

Medium (4/8)

Answer — Conversion terms and preference

A. Set preference per share equal to the converting balance divided�by converted shares.

Why: The proposed per-share preference times the unchanged share�count equals the converting balance.

Other choices: B changes ownership. C changes conversion upside. D�changes reporting. E changes residual participation. None of those�satisfies both stated objectives.

Takeaway: Negotiate the share count and preference amount as�distinct economic terms.

Cooley: valuation caps and preference overhang; Y Combinator: post-money SAFE mechanics.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

50

W6-S049

143

Medium (4/8)

Pool size and who funds the pool are different questions

An option pool is a reserve for equity awards; it is not itself a�stockholder.

Negotiate:

• Size: how much ungranted capacity remains after closing?

• Pricing treatment: is the pool increase included in the pre-money�share count?

• Hiring need: what awards are needed before the next financing?

“15% of post-closing fully diluted shares” describes the pool's size. It�can still be funded pre-money and dilute existing holders rather than�the new investor.

Cooley: negotiating the option pool.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

51

The same 15% pool can cost founders different amounts

Illustration: founders initially own 100%; $9M pre-money; $3M new cash;�no existing pool or convertibles. Create a 15% final ungranted pool.

In the second case: founders = 75% × 85%; investor = 25% × 85%.

The comparison holds the headline valuation and new cash fixed. It does�not promise the investor the same final ownership in both structures.

Cooley: negotiating the option pool.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

52

Knowledge check — Option-pool pricing

Assumptions: Hold�pre-money valuation�and new cash fixed.�Include the pool�increase in the pricing�capitalization. No�convertibles or special�protection rights alter�the allocation.

An investor requires�the new option pool to�be created pre-money.�What is the effect on�the founders?

A. Founders and the new investor share the increase�according to their post-round ownership.

B. Founder ownership changes only when employees�later exercise options granted from the reserve.

C. Existing pre-money holders absorb the increase�before the new investor's shares are priced.

D. The reserve replaces planned investor shares and�preserves the founders' original ownership�percentage.

E. The added reserve raises the investor's share price�and reduces the shares it purchases.

Cooley: negotiating the option pool.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

53

W6-S053

143

Medium (4/8)

Answer — Option-pool pricing

C. Existing pre-money holders absorb the increase before the new�investor's shares are priced.

Why: Including the pool increase in the pre-money denominator�lowers the financing price and assigns that increase to existing�holders.

Other choices: A describes a pool added after financing. B ignores the�pricing reserve. D substitutes a mechanism the terms do not provide. E�reverses the effect on share price.

Takeaway: The final pool percentage and the allocation of its dilution�are separate terms.

Cooley: negotiating the option pool.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

54

W6-S053

143

Medium (4/8)

Solving a pre-money option-pool top-up

When the new reserve enters pre-money pricing, adding reserve shares lowers the�price per share and increases the number of shares issued for new cash. Solve�those effects together.

Let S be existing fully diluted shares, including the current ungranted reserve U. Let�X be additional ungranted shares, V pre-money value, I new investment, and q the�required final ungranted-reserve fraction.

Only the ungranted reserve counts toward an ungranted-reserve target. Granted�options still belong in fully diluted shares, but not in that target's numerator.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

55

A pool top-up with an existing reserve

Illustration: 10m existing fully diluted shares include 6m founder shares and a 0.5m ungranted�reserve. Raise $4m at $16m pre-money. The ungranted reserve must be 10% of final fully�diluted shares. No other capitalization changes occur.

Let X be added reserve shares, in millions:

0.5 + X = 10% × (10 + X) × (1 + 4 / 16)

0.5 + X = 1.25 + 0.125X, so 0.875X = 0.75 and X = 0.857143m.

Retain full precision until the final answers. The new investor holds 20%; the pre-money�holders bear the reserve increase.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

56

Question: The option-pool top-up

KNOWLEDGE CHECK

A startup has the following pre-financing fully diluted capitalization:

The proposed financing has three terms:

• New investment: $6 million at an $18 million pre-money valuation.

• The ungranted reserve alone must equal 12.5% of fully diluted shares�immediately after closing. Granted options do not count toward this target.

• Any additional reserve is created before the investment and included in the�share count used to price the new shares.

All shares and options count one-for-one as common-equivalent shares. There�are no other securities, conversions, exercises, or transactions. The listed�amounts remain unchanged except for the required reserve increase.

How many additional shares must be added to the ungranted reserve, and�what will the founders' fully diluted ownership percentage be after closing?�Round ownership to two decimal places.

A. Additional reserve:�714,286 shares; founder�ownership: 46.32%.

B. Additional reserve:�600,000 shares;�founder ownership:�46.88%.

C. Additional reserve:�1,000,000 shares;�founder ownership:�46.15%.

D. Additional reserve:�1,200,000 shares;�founder ownership:�44.12%.

E. Additional reserve:�1,800,000 shares;�founder ownership:�41.67%.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

57

W6-S057

143

Hard (7/8)

Answer: The option-pool top-up

KNOWLEDGE CHECK

D. Additional reserve: 1,200,000 shares; founder ownership: 44.12%.

Work the calculation

Let x be the additional reserve in millions of shares.�Pre-round FD shares are 9 + x. Because the new investment�is one-third of pre-money value, new shares equal (9 + x)/3,�and post-round shares equal (9 + x) × 4/3.

The reserve condition is (0.5 + x) / [(9 + x) × 4/3] = 12.5%.�Solving gives x = 1.200000 million shares.

Price = $18 million / 10.2 million =�$1.76470588; new shares = 3.4 million. The�pre-money pool expansion dilutes the�pre-round holders, while the new investor still�receives 25%.

Why the other choices are wrong

A. Sizes the reserve to 12.5% of pre-round�shares instead of post-round shares.

B. Counts granted options toward a�requirement that expressly applies only to the�ungranted reserve.

C. Prices the new shares before creating the�top-up, then adds a pool that also dilutes the�new investor.

E. Treats the existing ungranted reserve as�zero when solving the required additional�reserve.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

58

W6-S057

143

Hard (7/8)

Multiply retained ownership across rounds

If a founder does not invest, sell shares, or receive additional awards:

Final ownership = starting ownership�× (1 − dilution₁) × (1 − dilution₂) × …

Example: starting at 100%, rounds that dilute prior holders by 20% and�then 25% leave:

100% × 80% × 75% = 60% ownership

Total dilution is 40%, not 45%.

An additional 40% dilution leaves 60% × 60% = 36% ownership. These�are illustrative round inputs, not a standard Series B outcome.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

59

Founder cap table with options and convertible claims

Illustrative pro forma after modeled conversions, before new financing cash or a pool�increase. Existing preferred converts 1:1.

Note: $500K including interest /�$1.25 conversion price = 400,000�shares.

SAFE: $500K / $10M post-money cap�= 5%. The cap governs.

The other common equivalents total�9.5M.

Total = 9.5M / 95% = 10M. SAFE = 5%�× 10M = 500,000 shares.

Founders hold 75% of the 8M�currently issued shares, and 60% on�this modeled basis. The ungranted�reserve has no current owner.

Cooley: issued versus fully diluted; Y Combinator: post-money SAFE mechanics; Cooley: pricing a round with convertibles. Illustrative contract terms and�calculations.

Knowledge check — Ownership after new cash

Before a priced round, the agreed capitalization contains 9M common�equivalents excluding one SAFE, including 5M founder shares. A $1M�YC-style post-money SAFE has a $10M cap, which governs conversion.�New cash investors receive 20% of post-closing ownership. With no�other capitalization changes, what do founders and SAFE holders own�after closing?

A. Founders: 44.44%. SAFE holders: 8.00%.

B. Founders: 40.00%. SAFE holders: 8.00%.

C. Founders: 40.00%. SAFE holders: 10.00%.

D. Founders: 41.67%. SAFE holders: 8.33%.

E. Founders: 30.00%. SAFE holders: 8.00%.

Y Combinator: post-money SAFE mechanics.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

61

W6-S061

143

Hard (6/8)

Answer — Ownership after new cash

B. Founders: 40.00%. SAFE holders: 8.00%.

Why: The SAFE represents $1M / $10M = 10% before new cash. Total�common equivalents are 9M / 90% = 10M.�Founders hold 5M / 10M = 50%. New cash leaves each prior stake at�80% of its size: founders 40%, SAFE holders 8%.

Other choices: A omits the SAFE from the founders' initial�denominator. C keeps the SAFE's percentage fixed. D divides prior�percentages by 1.20. E subtracts 20 percentage points from founders.

Takeaway: Reconcile the conversion denominator before applying�new-money dilution.

Y Combinator: post-money SAFE mechanics.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

62

W6-S061

143

Hard (6/8)

Price-based antidilution changes conversion terms

A covered down round sells shares below an earlier preferred series' protected�conversion price.

A lower conversion price increases that investor's common-share equivalents.

Exceptions, waivers, and capitalization definitions matter. These provisions do�not prevent every form of ownership dilution or guarantee an investor's return.

Cooley: full ratchet; Cooley: broad-based weighted average.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

63

Knowledge check — Full-ratchet adjustment

Assumptions: The lower-price issuance triggers the full-ratchet clause. No�exception or waiver applies.

In a down round, how does full-ratchet antidilution treat the earlier investor's�conversion price?

A. It keeps the old price until new financing exceeds the previous round's size.

B. It weights the old and new prices using the number of shares issued.

C. It resets the conversion price to the new lower price for the covered�issuance.

D. It reduces the liquidation preference amount while leaving the conversion�price unchanged.

E. It reduces the conversion price by the percentage decline in headline�company valuation.

Cooley: full ratchet.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

64

W6-S064

143

Easy (0/8)

Answer — Full-ratchet adjustment

C. It resets the conversion price to the new lower price for the�covered issuance.

Why: A covered lower-price issuance triggers the reset to that lower�price, without weighting the adjustment by issuance size.

Other choices: A adds an unstated size threshold. B describes�weighted average. D changes a different term. E substitutes headline�valuations for the protected per-share price.

Takeaway: Read the covered issue price, trigger, and exceptions in the�clause.

Cooley: full ratchet.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

65

W6-S064

143

Easy (0/8)

Weighted average makes the amount raised matter

For the same lower issue price, a small issuance normally produces a�smaller weighted-average reset than a large one.

Broad versus narrow: a broader defined capitalization generally�cushions the reset more, holding the financing and other terms fixed.

Full ratchet does not make this size adjustment.

Compare the post-financing cap table under the actual documents. A�conversion-price adjustment alone does not determine the founders'�final percentage.

Cooley: broad-based weighted average; Cooley: down rounds and the adjustment formula.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

66

Knowledge check — A small down round

Assumptions: Compare separate otherwise identical cases. No waiver or�exception applies.

An earlier preferred series has a $2 conversion price. A small covered financing�issues only 10,000 shares at $1. How does full ratchet differ from�weighted-average protection?

A. Neither adjusts the conversion price because the new issuance is too small.

B. Both reset to $1 because they respond only to the lower price.

C. Full ratchet makes a smaller adjustment than weighted average for small�issuances.

D. Full ratchet resets to $1. Weighted average also considers the issuance size.

E. Weighted average resets to $1. Full ratchet also considers the issuance size.

Cooley: broad-based weighted average; Cooley: down rounds and the adjustment formula; Cooley: full ratchet.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

67

W6-S067

143

Medium (4/8)

Answer — A small down round

D. Full ratchet resets to $1.�Weighted average also considers the issuance size.

Why: Full ratchet uses the covered $1 price even for a small issuance.�Weighted average considers that issuance relative to the defined�capitalization.

Other choices: A adds a size exemption. B treats both clauses as full�ratchet. C reverses their relative effect. E swaps the mechanisms.

Takeaway: A small financing can still trigger a large full-ratchet reset.

Cooley: broad-based weighted average; Cooley: down rounds and the adjustment formula; Cooley: full ratchet.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

68

W6-S067

143

Medium (4/8)

Negotiate economics, governance, and participation rights

Pro-rata rights require additional investment; they are not�automatically a veto or free antidilution protection.

Cooley's Series Seed investment agreement; Y Combinator: SAFE documents and terms; NVCA: model financing documents.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

69

Knowledge check — An unused pro-rata right

An investor has a pro-rata purchase right but no financing veto. The�company makes the required offer, and the investor declines before the�offer expires. What follows?

A. Its percentage is preserved through additional shares issued without�further payment.

B. Its percentage can fall because the right offered a chance to invest.

C. The company must cancel the financing because the investor declined�its allocation.

D. Its liquidation preference increases automatically to compensate for�the smaller ownership percentage.

E. It can buy the missed allocation later at the previous financing's price.

Cooley's Series Seed investment agreement; Y Combinator: SAFE documents and terms.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

70

W6-S070

143

Easy (1/8)

Answer — An unused pro-rata right

B. Its percentage can fall�because the right offered a chance to invest.

Why: The investor had an opportunity to purchase more securities on�the offered terms. Declining that opportunity does not prevent�dilution or stop the financing under the stated facts.

Other choices: A substitutes free shares for a purchase. C invents a�veto. D confuses participation rights with preference protection. E�invents a continuing right at an old price.

Takeaway: Maintaining ownership through a pro-rata right requires�investment on the applicable terms.

Cooley's Series Seed investment agreement; Y Combinator: SAFE documents and terms.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

71

W6-S070

143

Easy (1/8)

Maintaining ownership requires additional cash

Assume no pool changes or conversions and all buyers pay the same price. An�investor owning f of existing shares maintains f after a primary round by buying f�of the total new shares.

If the total round is $4m including that investor's purchase and f = 20%, the�investor contributes $0.8m; other investors contribute $3.2m.

If outsiders instead contribute a fixed $4m and the investor's purchase x is�additional, solve x / ($4m + x) = 20%. Then x = $1m.

State whether the quoted round includes the pro-rata check. The right permits a�purchase under its terms; it neither supplies free shares nor guarantees a future�investment.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

72

Question: A pro-rata check changes the round size

An existing investor owns 15% on the agreed fully diluted basis. New outside�investors will contribute exactly $3.4m in a primary round. The existing investor�may invest an additional amount at the same share price to preserve its 15%. No�options, conversions, or other capitalization changes occur.

How much must the existing investor contribute?

A. $0.510 million.

B. $0.600 million.

C. $0.690 million.

D. $0.400 million.

E. $3.910 million.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

73

W6-S073

143

Medium (4/8)

Answer: A pro-rata check changes the round size

B. $0.600 million.

Let x be the investor's additional check. To preserve 15%, it must buy 15% of all�new shares: x / ($3.4m + x) = 15%.

0.85x = $0.51m, so x = $0.60m. The full round is $4m and the investor buys 15% of�its new shares.

A applies 15% only to outside money; C increases the correct check again; D�understates the required purchase; E adds the outside raise to the mistaken�$0.51m check.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

74

W6-S073

143

Medium (4/8)

Board approval, preferred consent, and drag-along

• Board approval records the directors' decision under the applicable�voting rules.

• Protective provisions can require a separate preferred-stockholder�consent for specified actions.

• Drag-along obligations can require covered holders to support a�sale after the stated approvals and conditions are satisfied.

• Pro-rata rights concern buying securities in later financings.

When the documents require both board approval and preferred�consent, one approval does not replace the other.

Cooley's Series Seed investment agreement; NVCA: model financing documents.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

75

Knowledge check — Sale approvals

A sale requires board approval and consent from holders of a majority of preferred�shares. The drag-along activates only after both. The board votes 4–1 for the sale,�including the preferred investor's nominee. No preferred-stockholder vote or�written consent has occurred. What remains necessary before invoking the�drag-along?

A. Obtain consent from holders of the required majority of preferred shares.

B. Record the preferred nominee's board vote as the required preferred-holder�consent.

C. Invoke the drag-along so it supplies the preferred consent after board�approval.

D. Obtain common-holder majority approval in place of the separate�preferred-holder consent.

E. Certify the 4–1 board vote as satisfying both majority approval requirements.

Cooley's Series Seed investment agreement; NVCA: model financing documents.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

76

W6-S076

143

Medium (4/8)

Answer — Sale approvals

A. Obtain consent from holders of�the required majority of preferred shares.

Why: The nominee voted as a director. That board vote does not itself�constitute the required preferred-stockholder consent. The�drag-along condition still lacks its second approval.

Other choices: B treats a director's vote as stockholder consent. C�uses the drag-along before its trigger. D substitutes the common�class. E treats two approval requirements as one board vote.

Takeaway: Identify the capacity in which each person votes and the�approval that vote supplies.

Cooley's Series Seed investment agreement; NVCA: model financing documents.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

77

W6-S076

143

Medium (4/8)

Vesting determines what a departing founder can keep

Founder common stock can be issued upfront but remain subject to a�company repurchase right that lapses as it vests.

Illustrative schedule: four years, a one-year cliff, then monthly vesting.�It is a negotiated example, not a legal requirement.

Under this schedule, 25% vests at month 12. Then 1/48 of the original�grant vests each month for 36 more months.

Before the cliff, a departure may leave all shares unvested. The�company's repurchase rights and price follow the agreement.

Acceleration also depends on the contract: a sale alone may trigger it,�or a sale plus a qualifying termination may be required.

Cooley: founders' stock and vesting.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

78

Knowledge check — Vesting after the cliff

A founder receives 4.8M shares. Vesting is 25% at month 12, then 1/48�of the original grant each month. The founder leaves immediately after�month 18 vesting. The company exercises its right to repurchase all�unvested shares at cost. No acceleration applies. How many shares�does the founder retain?

A. 1.2M shares

B. 4.8M shares

C. 0.6M shares

D. 3.0M shares

E. 1.8M shares

Cooley: founders' stock and vesting.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

79

W6-S079

143

Medium (4/8)

Answer — Vesting after the cliff

E. 1.8M shares

Why: The cliff vests 25% × 4.8M = 1.2M shares.�Six more months add 6 × (4.8M / 48) = 0.6M. The founder keeps 1.8M�vested shares, and the company repurchases the other 3.0M.

Other choices: A ignores vesting after the cliff. B treats the cliff as full�vesting. C counts only the six later months. D reports the unvested�shares the company repurchases.

Takeaway: Apply the vesting schedule through departure, then apply�the contractual repurchase right.

Cooley: founders' stock and vesting.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

80

W6-S079

143

Medium (4/8)

Section 83(b): the clock starts at property transfer

For eligible substantially nonvested property transferred for services,�an 83(b) election chooses current compensation income based on:

Fair market value at transfer − amount paid

The filing deadline is generally 30 days after the property is�transferred, not the first vesting date.

The election does not vest the shares or remove repurchase rights. It�is not automatically the best tax outcome.

An ordinary unexercised option grant is not itself the restricted-stock�transfer described here.

IRS: Form 15620 and instructions; IRS: section 83(b) tax treatment. U.S. federal rules reviewed September 23, 2026.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

81

Knowledge check — Restricted stock election

A founder receives eligible substantially nonvested stock today. The first�vesting date is next year. Which action and effect correctly describe a section�83(b) election?

A. File within 30 days of transfer to choose current compensation-income�treatment.

B. File within 30 days of first vesting to fix the original share value.

C. File with the next tax return to have every unvested share treated as�vested.

D. File before the eventual sale to qualify automatically for a capital-gains�exclusion.

E. File within 30 days of transfer to eliminate the agreement's repurchase�provision.

IRS: Form 15620 and instructions; IRS: section 83(b) tax treatment. U.S. federal rules reviewed September 23, 2026.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

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Easy (0/8)

Answer — Restricted stock election

A. File within 30 days of transfer to choose current�compensation-income treatment.

Why: The election generally uses the transfer date for the 30-day�deadline and elects current income based on transfer-date fair value�less the amount paid.

Other choices: B starts the clock at vesting. C uses the tax-return�deadline and changes vesting. D substitutes QSBS-like relief. E�changes a contractual repurchase term the election does not change.

Takeaway: The election changes tax treatment while the stock�agreement continues to govern vesting.

IRS: Form 15620 and instructions; IRS: section 83(b) tax treatment. U.S. federal rules reviewed September 23, 2026.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

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W6-S082

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Easy (0/8)

Question: Founder exit proceeds

KNOWLEDGE CHECK

Founders own all of a company before choosing between two�financing offers. Each investor provides $4 million of new�primary capital.

There are no options, convertibles, later rounds, dividends, or�additional preferences. Under either offer, the company is later�sold for an enterprise value of $24 million. At that time it has $4�million of debt, $2 million of transaction costs, and no excess�cash. Compare that same exit under each offer.

What would the founders receive under Offers A and B,�respectively, rounded to the nearest $0.01 million?

A. Offer A founder proceeds:�$14.40 million; Offer B founder�proceeds: $15.00 million.

B. Offer A founder proceeds:�$14.00 million; Offer B founder�proceeds: $10.00 million.

C. Offer A founder proceeds:�$14.00 million; Offer B founder�proceeds: $8.33 million.

D. Offer A founder proceeds:�$19.20 million; Offer B founder�proceeds: $13.33 million.

E. Offer A founder proceeds:�$14.00 million; Offer B founder�proceeds: $11.67 million.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

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Hard (7/8)

Answer: Founder exit proceeds

KNOWLEDGE CHECK

C. Offer A founder proceeds: $14.00 million;�Offer B founder proceeds: $8.33 million.

Work the calculation

Equity proceeds available at exit = $24�million − $4 million − $2 million = $18 million.

Offer A: Investor ownership = $4/($16 + $4)�= 20%. Conversion would yield $3.6 million,�below the $4 million preference. The investor�takes $4 million; founders receive $14 million.

Offer B: Investor ownership = $4/($20 + $4)�= 1/6. The investor first receives $8 million,�then 1/6 of the $10 million remainder: total�$9.666667 million. Founders receive 5/6 of�the remainder, or $8.333333 million.

The higher headline pre-money value does�not produce higher founder proceeds at this�exit. Choosing between complete offers still�requires considering other exits, financing�needs, and governance.

Why the other choices are wrong

A. Treats both securities as common equity�and ignores their preferences.

B. Pays Offer B’s 2× preference but omits the�investor’s subsequent participation.

D. Distributes the $24 million enterprise sale�price without first paying debt and�transaction costs.

E. Applies a 1× preference to Offer B rather�than the stated 2× preference.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

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Hard (7/8)

Five questions to ask before accepting the deal

1. What does the ownership percentage count? Reconcile issued,�as-converted, and fully diluted shares.

2. What pays at each exit? Model share counts, preference priority,�participation, caps, and conversion together.

3. Who absorbs new shares? Show convertibles and pool increases�explicitly.

4. What happens in the next round? Multiply retention factors and test�down-round terms.

5. Who decides, and what can I keep? Read governance, participation�rights, vesting, and time-sensitive tax provisions.

The cap table shows claims and ownership. The waterfall shows their payoff�at a specified exit; it is not, by itself, today's fair value.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

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Optional practice and reference

The main sequence teaches the concepts and includes foundation questions�followed by applied challenges.

The following slides retain additional questions, worked answers, and deeper�reference for independent practice or extra class time.

Each question stays with its answer. Use the topic titles to select practice; the�appendix does not introduce a prerequisite needed for the main lesson.

Devon Coombs CPA, MBA | Santa Clara University | FIN143

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Knowledge check — Pre-money and post-money

Assumptions: One primary cash financing. No converting instruments,�pool changes, secondary sales, or other capitalization adjustments.

An investor puts $4M into a company at a $16M pre-money valuation.�What percentage does the investor own?

A. 25.00%

B. 20.00%

C. 16.67%

D. 80.00%

E. 33.33%

Cooley: pricing a round with convertibles.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

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Easy (2/8)

Answer — Pre-money and post-money

B. 20.00%

Why: Post-money value is $16M + $4M = $20M. New investor�ownership is $4M / $20M = 20%.

Other choices: A uses the value before investment. C counts the new�cash twice, dividing by $24M. D reports existing ownership. E divides�by $12M after subtracting instead of adding cash.

Takeaway: The new investor's ownership is measured after its money�enters the company.

Cooley: pricing a round with convertibles.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

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W6-S088

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Easy (2/8)

Knowledge check — Participation cap and conversion

Assumptions: One preferred series. No debt, fees, dividends, or other�claims.

An investor paid $3M for 25% ownership with 1x participating preferred�and a 2x total participation cap. It may instead convert to common. At an�exit with $32M available to equity, which payout should it choose?

A. $6.00M

B. $8.00M

C. $10.25M

D. $11.00M

E. $3.00M

Cooley: liquidation preference.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

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Hard (6/8)

Answer — Participation cap and conversion

B. $8.00M

Why: The preferred route is capped at $6M.�Conversion pays 25% × $32M = $8M, so conversion pays more.

Other choices: A extends the cap to conversion. C ignores the cap. D�also participates in the preference dollars. E leaves the more valuable�conversion election unused.

Takeaway: Compare the available payoff routes�under the stated contract.

Cooley: liquidation preference.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

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Hard (6/8)

Knowledge check — Note conversion and founder ownership

Assumptions: Same founder�shares, note balance, discount,�headline pre-money, and new�cash. No other securities. Fixed�pre-money sets price from�existing shares. Fixed�post-money instead preserves�the incoming investor's cash /�(pre-money + cash) ownership.

Compared with the fixed�pre-money method, the fixed�post-money conversion�method does what to�founders?

A. The lower new-money price issues more note�and investor shares, reducing founder�ownership.

B. The lower new-money price issues fewer�investor shares, protecting the founders'�remaining ownership.

C. The unchanged headline pre-money valuation�keeps founder ownership identical under both�pricing methods.

D. The fixed investor percentage reduces note�shares and transfers the dilution to note holders.

E. The fixed post-money value gives founders�additional shares to offset the note's conversion.

Cooley: pricing a round with convertibles.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

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Hard (6/8)

Answer — Note conversion and founder ownership

A. The lower new-money price issues more note and investor shares,�reducing founder ownership.

Why: Holding the incoming investor's percentage fixed requires a�lower price in this scenario. More note and new-money shares then�dilute the unchanged founder share count.

Other choices: B reverses the price/share relationship. C confuses a�headline valuation with the final cap table. D contradicts discounted�conversion mechanics. E invents a compensating founder issuance.

Takeaway: Identify what the parties hold fixed before allocating note�dilution.

Cooley: pricing a round with convertibles.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

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Hard (6/8)

Knowledge check — Ownership after two rounds

Assumptions: No pool increase, conversion, or other capitalization�change.

A founder owns 75% before two financings. The rounds dilute existing�holders by 20% and then 25%. The founder does not invest, sell, or�receive new shares. What percentage remains?

A. 30.00%

B. 56.25%

C. 45.00%

D. 41.25%

E. 75.00%

Illustrative inputs. Calculations follow the stated assumptions.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

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Easy (2/8)

Answer — Ownership after two rounds

C. 45.00%

Why: Retained ownership is 75% × 80% × 75% = 45%. The stake loses�30 percentage points, equal to 40% of its original size.

Other choices: A subtracts dilution as percentage points. B applies�only the second round. D adds the dilution rates before applying them.�E assumes no dilution because the founder sold no personal shares.

Takeaway: Apply retention factors to the actual starting stake.

Illustrative inputs. Calculations follow the stated assumptions.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

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W6-S094

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Easy (2/8)

Knowledge check — Financing packages and founder proceeds

Assumptions: One preferred�series in each alternative. No�debt, fees, dividends,�options, or other claims.

Each offer invests $4M.�Founders own the remaining�shares.

At an exit with $12M available�to equity, which statement is�correct?

A. Offer B pays founders more because their�higher percentage applies to the entire exit.

B. Offer B pays founders more because both�investors recover only their original $4M.

C. Offer A pays founders more because its�investor receives only 20% of the exit.

D. Both offers pay founders equally because the�same investment creates the same preference.

E. Offer A pays founders more because its lower�preference leaves more residual proceeds.

Cooley: liquidation preference. Illustrative contract terms and calculations.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

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Hard (6/8)

Answer — Financing packages and founder proceeds

E. Offer A pays founders more because its lower preference leaves�more residual proceeds.

Why: A's investor takes max($4M, 20% × $12M) = $4M, leaving�founders $8M. B's investor takes $8M + 10% × $4M = $8.4M, leaving�founders $3.6M.

Other choices: A ignores preferences. B ignores B's 2x claim and�participation. C chooses the right offer for the wrong payout reason. D�ignores different preference terms.

Takeaway: Compare founder proceeds under each complete package�at the exit being considered.

Cooley: liquidation preference. Illustrative contract terms and calculations.

Devon Coombs CPA, MBA · Santa Clara University · FIN143

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Hard (6/8)

Waterfall breakpoints: read the payoff shape

One investor: $5M investment; 25% ownership; 1x preference. X is�proceeds available to equity. No dividends or other claims.

At each breakpoint, adjacent formulas give the same payout.

Cooley: liquidation preference.

Devon Coombs CPA, MBA · Santa Clara University · FIN143 · Appendix

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Knowledge check — Uncapped participation and conversion

Assumptions: One�ordinary uncapped�participating series with�positive preference and�ownership between 0%�and 100%. No special�conversion requirements.

On plain uncapped�participating preferred,�why is conversion usually�economically unattractive�in an acquisition?

A. Because the preference amount increases�automatically in proportion to the eventual exit�value.

B. Because conversion preserves the preference�and also adds a share of total proceeds.

C. Because participation applies to the entire exit�before any liquidation preference is deducted.

D. Because participation retains the preference�and adds a share of the remaining proceeds.

E. Because the investor's as-converted ownership�percentage decreases automatically when an�acquisition closes.

Cooley: liquidation preference.

Devon Coombs CPA, MBA · Santa Clara University · FIN143 · Appendix

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Medium (4/8)

Answer — Uncapped participation and conversion

D. Because participation retains the preference and adds a share of�the remaining proceeds.

Why: When proceeds X cover preference P,�participation pays P + f(X − P), while conversion pays fX. The�difference is P(1 − f). Below P, preferred takes available proceeds in�this model.

Other choices: A makes a fixed preference variable. B assumes�conversion retains the preference. C overstates the participation base.�E invents an exit-triggered ownership reduction.

Takeaway: Compare the contractual preferred payoff with the�conversion payoff.

Cooley: liquidation preference.

Devon Coombs CPA, MBA · Santa Clara University · FIN143 · Appendix

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Medium (4/8)

Weighted-average antidilution: a transparent calculation

New conversion price = old conversion price × (A + B) / (A + C)

• A = pre-issuance common equivalents included by the contract.

• B = new cash / old conversion price.

• C = actual new shares issued.

Illustration: old price $2; new cash $2M at $1 per share. Thus B = 1M and C = 2M.

An ungranted reserve is not included unless the contract's definition includes it.

Cooley: down rounds and the adjustment formula.

Devon Coombs CPA, MBA · Santa Clara University · FIN143 · Appendix

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Knowledge check — Weighted-average denominator

An earlier series has a $4 conversion price. A covered round sells 2M�shares for $4M. Use CPnew = CPold × (A + B) / (A + C), with B = 1M�and C = 2M. Which prices result from A = 18M versus A = 8M?

A. A = 18M: $3.60. A = 8M: $3.80.

B. A = 18M: $2.00. A = 8M: $2.00.

C. A = 18M: $3.80. A = 8M: $3.60.

D. A = 18M: $4.00. A = 8M: $4.00.

E. A = 18M: $4.21. A = 8M: $4.44.

Cooley: down rounds and the adjustment formula.

Devon Coombs CPA, MBA · Santa Clara University · FIN143 · Appendix

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Medium (4/8)

Answer — Weighted-average denominator

C. A = 18M: $3.80. A = 8M: $3.60.

Why: With A = 18M, $4 × 19/20 = $3.80.�With A = 8M, $4 × 9/10 = $3.60. The broader base softens the reset.

Other choices: A reverses the bases. B uses full ratchet. D makes no�adjustment. E inverts the formula's fraction.

Takeaway: A larger defined pre-issuance base reduces the weight of�the lower-price issuance.

Cooley: down rounds and the adjustment formula.

Devon Coombs CPA, MBA · Santa Clara University · FIN143 · Appendix

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Medium (4/8)

QSBS: eligibility comes before the exclusion percentage

Qualified small business stock (QSBS) can qualify for a U.S. federal gain exclusion�under section 1202.

Key conditions include an eligible noncorporate taxpayer, qualifying stock in a�domestic C corporation, generally original issuance, and the required�active-business and holding-period tests.

For stock issued after July 4, 2025, the gross-assets ceiling is generally $75M,�applying the statutory asset and aggregation rules:

• Historical test: the company or any predecessor must meet the ceiling at all�times in the statutory pre-issuance period.

• Issuance test: assets immediately after issuance, including new proceeds,�must also meet the ceiling.

That ceiling is an asset test, not a $75M negotiated valuation cap. Not every�startup, business activity, or stock transfer qualifies.

26 U.S.C. § 1202. U.S. federal rules reviewed September 23, 2026.

Devon Coombs CPA, MBA · Santa Clara University · FIN143 · Appendix

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QSBS acquired after July 4, 2025: holding period and limits

For otherwise qualifying stock acquired after July 4, 2025:

The eligible-gain limit is generally the greater of the applicable $15M per-issuer�dollar limit or 10× qualifying basis, subject to prior-gain, coordination, and�other statutory rules.

The percentage applies to eligible gain within the limit, not to all sale proceeds.

The $15M and $75M thresholds are indexed after 2026. Earlier acquisitions use�different rules; state treatment can differ.

26 U.S.C. § 1202. U.S. federal rules reviewed September 23, 2026.

Devon Coombs CPA, MBA · Santa Clara University · FIN143 · Appendix

105

Knowledge check — QSBS holding period

An eligible individual sells otherwise qualifying QSBS acquired after July 4,�2025 after holding it for three and a half years. Under the rules reviewed in�September 2026, which statement is correct?

A. No gain qualifies until the stock has been held for five full years.

B. 75% of eligible gain qualifies because the holding period rounds up to four�years.

C. 100% of eligible gain qualifies because the shares satisfy the QSBS�business tests.

D. 50% of eligible gain qualifies, subject to the applicable per-issuer gain�limit.

E. 50% of the total sale proceeds qualifies, subject to the applicable gain�limit.

26 U.S.C. § 1202. U.S. federal rules reviewed September 23, 2026.

Devon Coombs CPA, MBA · Santa Clara University · FIN143 · Appendix

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Easy (0/8)

Answer — QSBS holding period

D. 50% of eligible gain qualifies,�subject to the applicable per-issuer gain limit.

Why: Three and a half years falls in the at-least-three but�less-than-four-year band. The 50% exclusion applies to eligible gain�within the limit.

Other choices: A applies the older holding-period framework. B�rounds a statutory threshold upward. C ignores the holding-period�percentage. E substitutes sale proceeds for gain.

Takeaway: Apply the acquisition-date regime, exact holding period,�and eligible-gain basis.

26 U.S.C. § 1202. U.S. federal rules reviewed September 23, 2026.

Devon Coombs CPA, MBA · Santa Clara University · FIN143 · Appendix

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Easy (0/8)

Knowledge check — Spot the false premise�in the original question

Assumptions: This is an intentional error-detection exercise. Evaluate�the premise before choosing a letter; the original wording and options�are preserved below.

Why is founder dilution across several rounds greater than the sum of�each round viewed alone?

A. Each round dilutes a base that already holds all prior rounds

B. Because the early rounds are always larger than the later ones

C. Because the option pool is the single true source of dilution

D. Because founders sell personal shares at each successive round

E. Because preferred stock is left out of the share count entirely

Devon Coombs CPA, MBA · Santa Clara University · FIN143 · Appendix

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Answer — Spot the false premise in the original question

Answer: The question has a false premise.�None of A–E makes it true.

Why: For sequential dilution rates d₁ and d₂, cumulative dilution is�1 − (1 − d₁)(1 − d₂) = d₁ + d₂ − d₁d₂. For positive rates below 100%, it is�LESS than their sum.

Other choices: The source keyed A. A points toward repeated�changes in the share base, but cannot make the stem's 'greater than'�claim true. B–E do not explain the ownership arithmetic.

Takeaway: Example: 20% followed by 25% leaves 60% ownership and�40% total dilution, not 45% or more.

Devon Coombs CPA, MBA · Santa Clara University · FIN143 · Appendix

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