Compare equity tranches by the shares issued at each closing

An equity offer with two closings needs a capitalization model for each one. Identify how much the investor must pay, the conditions for each payment, the price applied and when shares are issued. Ask counsel whether the later subscription is binding subject to conditions, an investor option or a future negotiation. A promised total does not establish either final ownership or fully committed capital.

NVCA's model-document materials now address time-based and milestone-based tranches and expressly require tailoring to the transaction. Use the negotiated documents to determine the actual sequence. A financing model should distinguish shares already issued from shares that would be issued only if a later closing occurs.

Assume a hypothetical company has eight million existing share equivalents and no options, convertibles or other planned issuances. An investor provides $3 million at $3 per share in the first closing, receiving one million shares. There are now nine million equivalents. Existing holders own approximately 88.89% and the investor 11.11%.

The proposed second tranche is another $3 million after a milestone. For this illustration, shares are issued only when their corresponding subscription is funded, and all shares have identical equivalents for percentage calculations. These assumptions isolate pricing and issuance; they do not describe universal legal rights or the economics of different security classes.

If the second price is fixed at $3, another one million shares are issued. The investor then owns two million of ten million equivalents, or 20%. If the second price steps up to $4, it receives 750,000 additional shares and owns 1.75 million of 9.75 million, approximately 17.95%. Both completed structures deliver $6 million gross to the company.

A reset to $2 instead creates 1.5 million additional shares. The investor owns 2.5 million of 10.5 million, approximately 23.81%. The lower second price changes the final ownership even though neither tranche's dollar amount changed. The examples assume the stated prices are agreed; they are not forecasts of a future valuation.

Under the example's funding-and-issuance assumptions, no second closing leaves $3 million raised and the first-closing ownership of 11.11% for the investor. Do not display 20% ownership and $6 million cash merely because those were the expected completed-round figures. The unfunded shares remain outside the issued capitalization.

Have counsel explain what happens if a committed investor fails to fund, as distinct from declining an option it was entitled to decline. Identify any termination, repricing, forfeiture, remedy or continuing right in the actual documents. The spreadsheet must follow that interpretation; it cannot impose cancellation of already-issued shares as an invented solution.

Ask whether the investor receives voting, preference or other rights at the first closing that differ from its funded percentage. Compare those provisions separately. If replacement capital would be needed after a failed tranche, add its prospective shares in a new scenario instead of assuming another investor inherits the old price and terms.

Compare the staged proposal with an upfront subscription on equal gross funding. In this example, $6 million paid immediately at $3 also gives the investor 20%, but all cash arrives at once. A conditional later tranche at that same price leaves the company carrying a different funding dependency without changing completed-round dilution.

Present the first-closing cap table, each second-price case and the no-second-closing case for approval. Keep the dated cash-availability test alongside them. Before signing, reconcile subscription obligations, issuance dates and prices with counsel so management accepts the ownership outcomes and the capital commitment actually being offered.