In some situations, it can be tricky to ensure that the invested capital shown in Shareworks Startup matches the invested capital that was actually invested. In this article, we’ll:
- Explain Startup’s calculations related to invested capital, to help users better match that invested capital to reality.
- Walk through the calculations behind liquidation preference and discuss the similarities and differences between it and invested capital.
When entering a new stock issuance, Startup requests two main data points for each issuance, these will be used to calculate invested capital:
- Shares Issued
- Price Per Share (PPS)
Invested Capital is then a calculated field, calculated by multiplying Shares Issued, by Price Per Share. So for example, if Jane Doe received 55,469 shares in a round with a PPS on the round of $1.3521, Shareworks Startup would multiple the two and show an invested capital of $74,999.63.
But what if Jane actually invested $75,000? How can that be reflected? In order to reflect her actual invested capital, the PPS should be modified to more accurately reflect what she paid. In this case, Jane didn’t actually pay $1.3521/share, she paid $1.3521066.
It’s not uncommon for companies to round the shares received by each individual down in order to avoid fractional shares on a cap table. While rounding the shares is completely understandable, doing so does modify the actual Price Per Share paid by the individual, and will require an adjustment to the PPS recorded for the issuance.
IMPORTANT NOTE: There are two places to record Price Per Share. The PPS referenced above sits on the individual investment to permit an adjustment like the one above. In addition, a Price Per Share can be recorded on the Security Class itself. The Security Class PPS is the appropriate place to record the official PPS from the legal documents for the round, so in our example above, Jane’s personal PPS would be $1.3521066, but the PPS on the Security Class would be the $1.3521 from the company’s Articles of Incorporation. That distinction will influence our math when looking at the Liquidation Preference.
In many US C-Corporations, Preferred Stock receives a liquidation preference, which gives them a right to preferential payments that come ahead of the common in the event of an exit. The calculations for the Liquidation Preference can be found in the company’s Articles of Incorporation. Most often, the company’s Articles will determine the appropriate liquidation preference by multiplying the number of shares held by a defined price per share. In our example above, that defined price per share would be $1.3521, and Jane’s overall Liquidation Preference would be $74,999.63. This can be potentially jarring, since the invested capital and liquidation preference differ. That said, it’s important that for companies with this fact pattern, there will legally be a difference between the invested capital, and liquidation preference. For additional questions or concerns, feel free to reach out at email@example.com and we can review and discuss your particular situation.