Have you heard about Leapfunder’s new Priced Equity product yet? Although the convertible has become the standard financial instrument for pre-seed and seed funding, we’re hoping that our priced equity product will provide a less technical alternative for many situations. Learn more!
Characteristics of a priced equity round
As the name suggests Leapfunder’s priced equity funding rounds offer the investor a fixed pre-money valuation: that’s the price for which investors get their shares. That much is easy.
The round is conducted just like any other Leapfunder round: investment is online without a notary. The startup can claim their cash as soon as the minimum is reached. Immediately after the startup got their cash, and the round is fully closed, the startup will finish up the paperwork and issue the actual shares to the investors. Because the cash has already gone to the startup this last administrative process does not hold up the distribution of cash: the startup can go right ahead using the capital.
What’s the catch?
The biggest risk with a priced equity funding round is that the valuation might be too far removed from a realistic market value. Unrealistic valuations will cause trouble down the road. That’s why Leapfunder requires the minimum investment in a round to be at least €100.000. Alternatively, there should be at least one investor that invested over €100.000 in the 3 months before the round went live. An investor with a €100.000 ticket is evidence that the market price for the shares is professionally approved. So these restrictions are intended to prevent valuations that don’t meet a professional standard.
Of course, the higher minimum investment makes it harder to arrange a priced equity round than a convertible round. The typical pattern we expect is that the first few rounds will still be convertible rounds, and later on, there might be a priced equity round.
A slight paradox
There’s a slight paradox: if a startup has closed a Leapfunder convertible round in the past then a Leapfunder priced equity round is not always a qualifying event. A standard Leapfunder note doesn’t convert until you do an equity round with a single €100.000 investor. A priced equity Leapfunder round has to be at least €100.000, but that amount can be spread over several investors. In other words, the test that a valuation is market realistic is actually tougher for a Leapfunder convertible then for Leapfunder priced equity.
How do we state the valuation?
We think that the pre-money valuation of the company is the simplest and most reliable indicator of the value. The share price used for Leapfunder priced equity investors is just that pre-money valuation divided by the total number of shares. For those who want to get technical: that means that if there are different shares classes the share price for the Leapfunder priced equity investors is simply the average over all of those classes.
What happens after the round?
After the round, the startup will create an SPV as usual. The SPV Shares will be offered to the investors. Since these actions usually require a notary it is somewhat time-consuming. It doesn’t affect the startup: the cash is already in use in the company. Be patient: the technical process for giving out real shares is often quite complicated: we can’t help that.
Ultimately, there is less to understand with our new priced equity product compared to the convertibles. However, we still believe though that in many situations, the convertible is the correct financial instrument to use, and we expect that, for the time being, it will remain the principal financial instrument on our website.