# Raising a Subsequent Round

Let's take a deeper dive into the mechanics of raising a subsequent round. Let's assume that seed investors have bought 20% of the company. Several employees have joined and were granted a total of say 7%, leaving 3% remaining option pool.

Given we have covered SAFE conversion already, in this example we assume the seed round was a priced one to simplify the calculations and emphasize the points on option pool and prorate. But the effect is the same.

Our starting cap table now looks like the following:

| Column 1 | Column 2 | Column 3 |
| --- | --- | --- |
|  | Ownership before Series A (shares) | Ownership before Series A (%) |
| Founder A | 1,000,000 | 35% |
| Founder B | 1,000,000 | 35% |
| Employees | 200,000 | 7% |
| Seed Investor | 571,428 | 20% |
| Available Option Pool | 85,714 | 3% |
|  | 2,857,142 | 100% |

Next, the founders agree with the Series A lead on an $8M investment at a $40M post money valuation. The new investor will buy enough new shares to own 20% of the cap table which translates to 714,286 shares (PPS is 32,000,000 / 2,857,142 = $11.2) and the investment would only dilute each shareholder by 20% (8/40). So founders' ownership would go from 35% to 28% (0.8\*35), etc. And the cap table would look as follows:

| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 | Column 6 |
| --- | --- | --- | --- | --- | --- |
|  | Ownership before Series A (shares) | Ownership before Series A (%) | New Series A Shares | Ownership after Series A (shares) | Ownership after Series A (%) |
| Founder A | 1,000,000 | 35% |  | 1,000,000 | 28% |
| Founder B | 1,000,000 | 35% |  | 1,000,000 | 28% |
| Employees | 200,000 | 7% |  | 200,000 | 5.6% |
| Seed Investor | 571,428 | 20% |  | 571,428 | 16% |
| Series A investor |  |  | 714,286 | 714,286 | 20% |
| Available Option Pool | 85,714 | 3% |  | 85,714 | 2.4% |
|  | 2,857,142 | 100% |  | 3,571,427 | 100% |

However, there are two problems with this cap table. First, the option pool has now been diluted down to 2.4%, barely enough for the number of new hires needed as part of this cash infusion. Additionally, the existing investors have also been diluted down to 16% but they often have pro-rata rights in the subsequent round. Addressing both problems will increase the dilution to the founders further.

## Refreshing the Option Pool

Let's start with the option pool. In order to create another 10% option pool, which is very common in a Series A, the company will need to reserve enough shares such that the option pool after getting diluted by the Series A investor will be 10%. In this case, the number is 354,286 new shares.

| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 | Column 6 | Column 7 |
| --- | --- | --- | --- | --- | --- | --- |
|  | Ownership before Series A (shares) | Ownership before Series A (%) | Option pool expansion | New series A shares | Ownership after Series A (shares) | Ownership after Series A (%) |
| Founder A | 1,000,000 | 35% |  |  | 1,000,000 | 25.26% |
| Founder B | 1,000,000 | 35% |  |  | 1,000,000 | 25.26% |
| Employees | 200,000 | 7% |  |  | 200,000 | 5.05% |
| Seed Investor | 571,428 | 20% |  |  | 571,428 | 14.43% |
| Series A investor |  |  |  | 791,837 | 791,837 | 20.00% |
| Available Option Pool | 85,714 | 3% | 354,286 |  | 395,918 | 10.00% |
|  | 2,857,142 | 100% |  |  | 3,959,183 | 100.00% |

But in order to maintain the Series A investor's target ownership of 20%, the number of Series A shares now have to go up from 714,286 shares to 791,837 (the dollar invested will be the same but the price per share will go down to $10.10), and the resulting cap table will end up with 1,146,123 new shares or a total dilution of **1,146,123 / 3,959,183 ~ 29%**.

For those interested in dilution math, shouldn't the final dilution just be 20% for the new investor + 7% option pool expansion = 27%? The reason the number is 29% and not 27% is that these new shares must dilute the existing shareholder and not dilute the Series A investor or the available option pool so they maintain their 20% and 10% respectively. In other words, existing shareholders are taking on more of the dilution.

## Dealing with Pro Rata

Now if the seed investors also decide to maintain their 20% ownership, they will need to participate in the round. The company now must issue additional shares to seed investors, the Series A investor, and allocate more options in the option pool. To address all these needs, the company will end up issuing a total of 1,542,858 new shares resulting in a cap table with 4,400,400 shares. Seed and A investors will both end up at 20%. But the founders will get hit by a whopping 35% dilution (1,542,858/4,400,400).

| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 | Column 6 | Column 7 |
| --- | --- | --- | --- | --- | --- | --- |
|  | Ownership before Series A (shares) | Ownership before Series A (%) | Option pool expansion | New series A shares | Ownership after Series A (shares) | Ownership after Series A (%) |
| Founder A | 1,000,000 | 35% |  |  | 1,000,000 | 22.73% |
| Founder B | 1,000,000 | 35% |  |  | 1,000,000 | 22.73% |
| Employees | 200,000 | 7% |  |  | 200,000 | 4.55% |
| Seed Investor | 571,428 | 20% |  | 308,572 | 880,000 | 20% |
| Series A investor |  |  |  | 880,000 | 880,000 | 20% |
| Available Option Pool | 85,714 | 3% | 354,286 |  | 440,000 | 10% |
|  | 2,857,142 | 100% |  |  | 4,400,000 | 100% |

It is not uncommon for founders to get hit with 25-30% total dilution in a Series A round. But fortunately there are strategies a founder can follow to limit the dilution.