Case 079Cap tables and round modellingHard

Tijorik Wealth raises Rs 120 crore at Rs 600 crore pre-money, of which Rs 30 crore buys founders' shares as a secondary at a 20% discount. Work out the shares issued and sold, the post-money ownership, the founders' cash and the investor's blended price.

The situation

Tijorik Wealth runs a digital wealth platform for salaried investors. It has 6 crore shares, of which the two founders hold 70% and earlier investors and the option pool hold 30%. A growth investor has agreed a Rs 120 crore round at a Rs 600 crore pre-money valuation, so the round price is Rs 100 a share.

Of the Rs 120 crore, only Rs 90 crore goes into the company as new shares. The other Rs 30 crore buys existing shares from the founders as a secondary sale, at a 20% discount to the round price. The founders have run the company for seven years on modest salaries and want some cash out.

Your task

How many shares are issued and sold, what is the post-money, who owns what, what cash do the founders get, and what did the investor really pay per share?

Quick check

What is Tijorik's post-money valuation?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Post-money is Rs 690 crore, the investor owns 18.5% and its blended price is Rs 94.12 a share, below the Rs 100 headline. Rs 90 crore buys 90 lakh new shares at Rs 100; Rs 30 crore buys 37.5 lakh founder shares at Rs 80. Founders get Rs 30 crore of cash before tax and fall from 70% to 55.4%. Reading it as Rs 120 crore of new money would give 16.7% at Rs 720 crore post, which is wrong.

Step 1Why do primary and secondary money have to be kept apart?

Picture a friend buying into your restaurant. If she pays the restaurant, the restaurant has more money and there is a new owner. If she pays you personally for part of your share, the restaurant has no new money; only the names on the ownership list change. PrimaryMoney paid to the company for newly issued shares. It adds cash and adds shares. money creates new shares and new cash in the company; secondaryMoney paid to an existing shareholder for shares they already own. The company gets nothing and the share count does not change. money moves existing shares from seller to buyer. The post-money valuation only counts what the company receives.

Step 2How many shares change hands, and at what prices?

Rs 600 crore pre-money over 6 crore shares is Rs 100 a share. Rs 90 crore of primary buys 90 lakh new shares at Rs 100, and Rs 30 crore of secondary buys 37.5 lakh founder shares at Rs 80. The share count rises from 6 crore to 6.9 crore, so post-money at the round price is Rs 690 crore. The investor ends with 1.275 crore shares for Rs 120 crore, a blended Rs 94.12 a share.

One cheque, two prices: Rs 90 crore in the company, Rs 30 crore to foundersPrimary: Rs 90 crore to the companynew shares at Rs 100: 90 lakh sharesSecondary: Rs 30 crto founders at Rs 8037.5 lakh old sharesRs 120 crore from the investorRs 70Rs 80Rs 90Rs 100Rs 110Price per share the investor paysSecondary Rs 80Round price Rs 100Blended Rs 94.12Post-money counts only new money: Rs 600 + Rs 90 = Rs 690 crore, and the investor owns 18.5%
Of Tijorik's Rs 120 crore round, Rs 90 crore buys new shares at Rs 100 and Rs 30 crore buys founder shares at Rs 80, so the investor's blended price is Rs 94.12 and the post-money is Rs 690 crore rather than Rs 720 crore.
The relationship
Stake=0.90+0.3756+0.90=1.2756.9=18.5%Blended price=1201.275=Rs 94.12\text{Stake} = \frac{0.90 + 0.375}{6 + 0.90} = \frac{1.275}{6.9} = 18.5\% \qquad \text{Blended price} = \frac{120}{1.275} = \text{Rs } 94.12
0.90crore new shares, Rs 90 crore at Rs 100
0.375crore founder shares, Rs 30 crore at Rs 80
6.9crore shares after the round; the secondary adds none
What it says in wordsThe investor owns its new shares plus the ones bought from the founders, over a total that grew only by the new shares.
Step 3What happens to the founders?

The founders held 4.2 crore shares. They sell 37.5 lakh and keep 3.825 crore of 6.9 crore, 55.4%. Without the secondary they would have held 60.9%; the cash costs them about 5.4 points of the company, for Rs 30 crore before tax. The tax on that sale depends on how long the shares were held and current capital gains rules, so a founder should confirm the treatment before agreeing a number. Other holders fall from 30% to 26.1%, diluted only by the primary.

Where the investor's 18.5% comes fromBefore the roundFounders 70.0%Others 30.0%After the roundFounders 55.4%Others 26.1%Investor 18.5%Misread: Rs 720 cr postEveryone else 83.3%16.7%The secondary moves founder shares to the investor; it adds no shares to the total.
The founders fall from 70% to 55.4% and other holders from 30% to 26.1%, leaving the investor with 18.5%, well above the 16.7% a reader gets by wrongly treating all Rs 120 crore as new money.
Step 4Why does the discount exist, and what does it mean for the investor?

The investor gets preferred shares from the company but ordinary shares from the founders, with no preference and often fewer rights, so a discount on the secondary is common. The discount also lowers the investor's real entry: at Rs 94.12 a share across 6.9 crore shares, it has effectively paid a Rs 649 crore post-money, not Rs 690 crore. For a board, the questions are whether Rs 30 crore to founders leaves them still hungry, and whether the headline Rs 100 price, which the company will announce, is being used to mark other holders' stakes when the investor paid less.

Where candidates lose it

The common error is adding the whole Rs 120 crore to the pre-money and calling the investor's stake 16.7%. That mixes money into the company with money to the founders, and understates the investor's ownership by nearly two points.

The second is pricing the secondary shares at Rs 100. The 20% discount buys 37.5 lakh shares, not 30 lakh, and that is where the blended price below Rs 100 comes from.

What the interviewer asks next

  • The investor insists the secondary shares convert into preferred shares. Why, and what should the founders ask for in return?
  • What if the discount were 35%? What happens to the blended price?
  • How would the earlier investors react to founders selling at Rs 80 when they are marked at Rs 100?

Company names and figures are illustrative.