This post follows Crunchbase’s “A Startup Takes Flight” series, which explores the journey of Internet of Wings, a cutting-edge drone meal delivery startup. We follow their path from securing venture capital and navigating valuation challenges to ultimately achieving a successful exit. Along the way, we also break down how VCs protect their investments through mechanisms like anti-dilution provisions and pro rata rights.
Company Formation
Cap Tables Share Structures Valuations – Case Study Early Stage Funding
Jack and Jill form Internet of Wings as a Delaware C Corporation — the standard legal structure for venture-backed startups — with 10,000,000 shares of Common Stock authorized at a par value of $0.001 per share, establishing an initial valuation of $10,000. Ownership is split 60/40 in favor of Jill, with 20% of the equity reserved for an employee stock option pool.
| Shareholder | Percent | # of Shares | Price | Value |
| Jill | 48% | 4,800,000 | $0.001 | $4,800 |
| Jack | 32% | 3,200,000 | $0.001 | $3,200 |
| Options Pool | 20% | 2,000,000 | $0.001 | $2,000 |
| Total | 100% | 10,000,000 | $10,000 |
Seed Rounds: Priced vs. Unpriced
Seed funding comes in two primary forms: priced and unpriced rounds. In a priced round, the company receives a valuation, and investors purchase shares at a set price based on that valuation. In contrast, an unpriced round — now more common — does not assign a valuation upfront. Instead, investors provide capital in exchange for future equity to be issued during a later, priced round. Unpriced rounds offer speed and simplicity, especially in early-stage fundraising, while postponing valuation negotiations until a future round.
Unpriced Rounds: Key Instruments
- Convertible Notes: Begin as debt and convert into equity during a future priced round. They include interest and maturity terms.
- Simple Agreements for Future Equity (SAFE) Notes: Introduced by Y Combinator in 2013, these are simpler, non-debt agreements that convert to equity without interest or maturity, making them more founder-friendly.
Seed Round
Jack and Jill raise $5 million in an unpriced Seed round from two investors. Since this is an unpriced round, no new shares are issued and the company’s valuation remains unchanged, as no specific valuation is assigned at this stage.
- Opaque Ventures invests $2.5M via a SAFE with a 20% discount
- BlackBox Capital invests $2.5M via a SAFE with a $10M valuation cap.
Clauses like valuation caps and discounts allow investors to purchase shares at a price lower than the prevailing price per share. This increases the number of shares they are able to purchase, and thus results in more shares being created, raising the post-money valuation.
Unpriced Rounds: Key Provisions
- Discounts: Allow investors to convert their notes into shares at a reduced price during the next funding round (typically Series A). Result in investors receiving more shares and greater value when their notes convert.
- Valuation Caps: Set a maximum company valuation for note conversion, protecting the investor’s ownership percentage. Prevent dilution from unexpectedly high valuations in future rounds.
Series A Round
Eighteen months after their seed round, Jack and Jill’s startup is thriving but not yet profitable, with just eight months of runway left. To sustain growth, they began raising a $7 million Series A round. This marks the company’s first priced round, assigning a formal valuation to its shares.
- Pre-money valuation refers to a company’s value before new capital is added in a funding round.
- Post-money valuation is the value after the round, typically calculated by adding the capital raised to the pre-money valuation.
For Internet of Wings, Cormorant Ventures sets a $15 million pre-money valuation:
- Cormorant Ventures will lead the round by investing $4 million
- Provident Capital is participating with its investment of $2 million
- BlackBox Capital rounds out the round with $1 million
Although the base post-money valuation is $22 million, conversion terms from earlier SAFE investments—such as discounts and valuation caps—generate extra shares at lower prices, raising the actual post-money valuation.
| Capitalization Table after Series A | Value |
| Pre-Money Valuation | $15,000,000 |
| Total # of Shares | 10,000,000 |
| Price Per Share | $1.5 |
Seed Conversions
- Opaque Ventures
- Invested $2.5M in a SAFE with a 20% discount,
- Converting at $1.20/share during = 2.5M / $1.2 = 2,083,333 shares
- Series A (priced at $1.50/share)
- 2,083,333 shares x $1.5 Series A Price = $3.125M — a 1.25x return
- BlackBox Capital invested $2.5M in a SAFE with a $10M valuation cap:
- At 10M cap / 10M shares outstanding = $1 per share conversion
- So 2.5M / $1 per share = 2,500,000 shares
- 2,500,000 shares x $1.5 Series A Price = $3.75M — a 1.5x return.
| Investor: | Opaque (Discount) | Black Box (Cap) | Total |
| Investment | $2,500,000 | $2,500,000 | $5,000,000 |
| Discount Provision | 0.2 | $10,000,000 | |
| Series A Price per Share | 1.5 | $1.5 | |
| Conversion Price Per Share | 1.2 | $1 | |
| # of Shares | 2,083,333 | 2,500,000 | 4,583,333 |
| Value | $3,125,000 | $3,750,000 | $6,875,000 |
| MOIC | 1.3 | 1.5 | 1 |
| Investor: | Opaque (No Discount) | Black Box (No Cap) | Total |
| Investment | $2,500,000 | $2,500,000 | $5,000,000 |
| Discount Provision | N/A | N/A | |
| Series A Price per Share | $1.5 | $1.5 | |
| Conversion Price Per Share | N/A | N/A | |
| # of Shares | 1,666,667 | 1,666,667 | 3,333,333 |
| Value | $2,500,000 | $2,500,000 | $5,000,000 |
| MOIC | 1 | 1 | 1 |
| Shareholder | Class | # of Shares | Percent | Price | Value |
| Jill | Common | 4,800,000 | 24.9% | $1.50 | $7,200,000 |
| Jack | Common | 3,200,000 | 16.6% | $1.50 | $4,800,000 |
| Employee Pool | Common | 2,000,000 | 10.4% | $1.50 | $3,000,000 |
| Opaque Ventures | Seed Pref. | 2,083,333 | 10.8% | $1.50 | $3,125,000 |
| Blackbox Capital | Seed Pref. | 2,500,000 | 13.0% | $1.50 | $3,750,000 |
| Cormorant Ventures | Series A Pref. | 2,666,667 | 13.9% | $1.50 | $4,000,000 |
| Provident Capital | Series A Pref. | 1,333,333 | 6.9% | $1.50 | $2,000,000 |
| Blackbox Capital | Series A Pref. | 666,667 | 3.5% | $1.50 | $1,000,000 |
| TOTAL | 19,250,000 | 100.0% | $28,875,000 |
Although the expected post-money valuation was $22 million, the actual valuation rose to approximately $28.875 million due to valuation caps and discounts from earlier SAFE investors, which created additional shares by allowing them to buy in at lower prices.