How do you calculate Series A price per share?

Takeaway: The equation to calculate price per share in a financing is (Price = Pre-money Valuation / Pre-money Capitalization). The Pre-money Capitalization is the number of fully-diluted shares outstanding before the financing and often includes an increase to the equity incentive plan.

In a Series A financing round, startups raise capital from investors by selling preferred stock. Determining the price per share for this stock is a crucial step, as it sets the value of the company and the ownership stakes of both existing and new stockholders. In this post, we will walk through the process of calculating the Series A price per share using the pre-money valuation and the amount of capital raised.

Step 1: Determine the Pre-Money Valuation

The pre-money valuation is the value of the startup before the Series A funding round. This valuation is typically negotiated between the startup's founders and the investors, taking into consideration factors such as the company's financial performance, market potential, competitive landscape, and the experience of the founding team.

For example, let's assume that the pre-money valuation of a startup is $10 million.

Step 2: Calculate the Total Pre-Money Shares

To calculate the price per share, you first need to determine the total number of shares outstanding before the Series A round. This includes both common and preferred shares issued to founders, employees, and previous investors. This number typically also includes any increase to the company’s equity incentive plan.

For instance, let's assume that the startup has a total of 10 million pre-money shares outstanding.

Step 3: Calculate the Series A Price Per Share

Divide the pre-money valuation by the total number of pre-money shares (typically including any increase to the equity incentive plan) to calculate the price per share:

Price Per Share = Pre-Money Valuation / Total Pre-Money Shares

Using our example:

Price Per Share = $10,000,000 / 10,000,000 = $1.00 per share

Conclusion

Calculating the price per share in a preferred stock financing is an essential step in the fundraising process, as it determines the value of the company and the ownership stakes for both existing and new stockholders. By following the steps outlined in this blog post, startups can ensure that they are accurately valuing their company and providing fair terms to their investors. Keep in mind that the price per share is only one aspect of the Series A financing round, and other factors such as the terms and conditions of the investment, voting rights, and liquidation preferences should also be carefully considered. It is advisable to work with an experienced attorney to build a pro-forma capitalization table illustrating the impact of the financing round. By understanding the mechanics behind the price per share calculation, founders can better prepare for negotiations with investors, have a firm understanding of the dilution they will incur, and secure the necessary capital to grow their business.