Let's say Company X has 9,000 shares of common stock outstanding. It raises $1 million at a $10 million post-money valuation with a 1x non-participating liquidation preference. Its cap table is thus 1,000 shares of Series A preferred stock on top of 9,000 shares of common.

It then raises $10 million at a $50 million valuation with similar preference terms. Its cap table is now 2,500 shares of Series B preferred stock on top of 1,000 shares of Series A preferred stock on top of 9,000 shares of common.

Let's contemplate a $100 million exit. Everyone converts to common at $100 million / 12,500 shares, or $8,000 per share. Series A bought at $1,000 and thus sees an 8x return; Series B bought at $4,000 and thus sees 2x.

Let's contemplate a $50 million exit. Everyone converts at $50 million / 12,500 shares, or $4,000 per share. Series A gets 4x; B comes out flat.

Let's contemplate a $25 million exit. Series B does not convert. Instead, it demands its 1x liquidation preference and gets $10 million. This leaves $15 million on the table, or $1,500 per share. Series A converts and sees its 1.5x return; B comes out flat.

Let's contemplate a $15 million exit. Series B does not convert and gets its $10 million. This leaves $5 million on the table, or $500 per share. Series A does not convert and demands its $1 million. Series A and B come out flat; common gets $4 million / 9,000 shares, or about $444.

Let's contemplate a $10 million exit. Series B gets its $10 million and comes out flat; everyone else gets screwed.

Let's contemplate a Theranos exit. Everyone gets screwed. Turtleneck doesn't go to jail.

TL; DR Later stages are least volatile. They get screwed last, but also see upside last. Lower rungs' returns pay for this safety.

> Can you walk me through the math. How does one arrive at 1K of Series A preferred from 9K of common stock? How is that being derived? I'm not following.

At time t=0 (probably at founding and when hiring its first few employees) Company X issued 9,000 shares of common stock. At time t=1 it decides to issue 1,000 shares in a series A offering (most likely to VCs and outside investors). They are separate events.

1000 shares x $1000/share = $1m raised for the company in the series A.

> Also what is meant by "post-money" valuation? I'm assuming there is a corresponding "pre-money"?

https://en.wikipedia.org/wiki/Pre-money_valuation

In this case, pre-money valuation of Company X = $10m - $1m = $9m

> Lastly by "coming out flat" you mean made whole again i.e recouped their initial investment? Thanks.

Yes.

>"Let's say Company X has 9,000 shares of common stock outstanding. It raises $1 million at a $10 million post-money valuation with a 1x non-participating liquidation preference. Its cap table is thus 1,000 shares of Series A preferred stock on top of 9,000 shares of common."

Can you walk me through the math. How does one arrive at 1K of Series A preferred from 9K of common stock? How is that being derived? I'm not following.

Also what is meant by "post-money" valuation? I'm assuming there is a corresponding "pre-money"?

Lastly by "coming out flat" you mean made whole again i.e recouped their initial investment?

Thanks.