Equity distribution · Equity

When and at what price to acquire additional equity in future?

Anonymous

December 4th, 2015

Looking for some ideas on what price to put on equity that can be purchased in the future. So for example, if I buy into a start-up now with 20% equity for $100, after what period of time should I be able to purchase more equity (let’s say up to another 10%)? And at what cost - for example, the same cost as when I originally bought the 20%? At that cost plus a percentage? At the estimated current value of the business? Or at a value that is agreed upon by all shareholders as ‘reasonable’?

Eager to know of any best practices around this topic.

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

December 4th, 2015

Any option to purchase equity in the future is a valuable right. Obviously, the lower the contract price, the more valuable the right. I don't know that there's a standard or a best practice. Terms can include a right of first refusal to invest in future equity rounds at the future price, as a means to avoid dilution. They can also include a right to buy more at the initial price, or anywhere in between. Terms are agreed to between the company and the investor, although depending on various stockholder agreements, other holders might be needed for approval, as well.