Let’s say, as an early-stage investor, you purchase 1,000,000 shares of Company A for $1 each in the company’s Series A fundraising round. After your investment, there are 10,000,000 shares outstanding, which makes your $1M investment worth 10% of the company’s $10M post-money valuation. 

Over time, Company A raises more capital from new investors in their Series B and Series C fundraising rounds. 

One day, an acquirer enters the picture and buys Company A for $100M.

You’re expecting 10% of the sale proceeds to hit your bank account for a $10M payday, but you come to realize that you're only entitled to $5M.

What happened between the time you made the investment and the acquisition?

Below, we’ll discuss everything you need to know about equity dilution.

Equity dilution— also known as “share dilution” or “fundraising dilution”— is when existing shareholders’ ownership percentage is reduced as a result of the company issuing new securities to investors. 

This occurrence is particularly common for startup companies and private market investors. 

When an entrepreneur starts a company, they typically own all outstanding shares. If they were to sell the company to someone else, they’d retain 100% of the net sale proceeds. 

However, during the fundraising process, startups issue securities in exchange for capital from investors. When the transaction is made, investors typically receive a fixed number of shares (equity) or a promise of future shares (SAFEs or convertible notes) for their investment. Importantly, this does not mean investors retain a fixed percentage ownership in the company. 

As a company raises additional capital from investors, each existing investor’s shares will represent a smaller percentage of the overall company. This is because the total number of outstanding shares increases, but existing shareholders own the same number of shares. 

Dilution starts from the first moment an entrepreneur raises outside capital either in the form of a SAFE, convertible note, or equity. This occurs whether or not the investor receives the shares at that moment or is given a promise to receive shares in the future. Even if the entrepreneur is giving investors a promise for future equity, the entrepreneur must consider future share conversions in order to forecast how much of the company investors will own in the future.  

Share dilution often impacts startup investors, especially considering high-growth companies need capital to fund their operations.  

Back to our example above, let’s say you’re the first venture capital investor in a company. You purchase 1,000,000 shares in the company’s Series A round for $1M on a $10M post-money valuation. Your 1,000,000 shares are worth 10% of the value of the company.  

Years later, the company needs more capital to grow, so it issues 5,000,000 more shares to new investors in its Series B fundraising round. 

And again, a few years later the company issued another 5,000,000 shares to investors in its Series C fundraising round. 

At this point, there are 20,000,000 total outstanding shares, and since you still own 1,000,000 shares, your ownership stake has been reduced from 10% to 5%.

As you can see, investors can be directly impacted by dilution, as more shares are issued, reducing your effective ownership in the company. If there was a liquidity event, you would be entitled to 5% of the proceeds, instead of the original 10% ownership you had.

Think shares of stock are the only thing that determines the amount of dilution investors can expect? Not so fast.

When investors purchase securities in a company, they want to know how many other shares or convertible securities are outstanding to understand how their investment may be diluted in the future. At the earliest stages of investment, for example, a pre-seed or seed round, investors will want to understand how many other outstanding convertible securities have been issued to investors, as well as shares set aside for the employee option pool. Additionally, investors will want to know if they are purchasing a pre-money SAFE or a post-money SAFE because the difference will determine how much dilution you experience when the SAFE converts to equity. 

Remember, when an investor purchases equity in a company, the price per share they pay is the 

. The larger the fully diluted capitalization table (remember: this represents all existing shares and any shares authorized to be issued in the future) is, the smaller an investor will pay per share and the more shares an investor will receive for a given investment. 

What’s included in the fully diluted capitalization table of a priced equity round? Well, this can be a point of negotiation between the entrepreneur and investors.

There are three key factors that impact the fully diluted capitalization table:

Whether or not the above factors are included in the fully diluted capitalization table of a financing round depends on negotiations between the investor and entrepreneur during the raise. 

The amount of dilution that occurs during a fundraising round varies greatly depending on the type and size of the round. 

That said, you can expect the following as a general guideline:

Most data suggests that dilution during Series C and later funding is highly dependent on a company’s valuation and funding needs. 

How to Protect Your Equity Ownership Percentage 

One way that investors can protect their equity ownership percentage is through formal pro rata rights. 

Pro rata rights represent an agreement between an investor and the company, giving the investor the right to participate in future fundraising rounds and retain their ownership percentage. 

Importantly, investors with pro rata rights are not required to invest in a future fundraising round but reserve the optionality to participate if they choose to. 

Pro rata rights are a privilege that is not granted to all investors, but rather only reserved for select investors. These rights are typically granted to investors via a side letter if occurring during a SAFE or convertible note investment, or in transaction documentation if included in a priced equity fundraising round. Beyond the formal extension of pro rata rights, investors must show the company why they deserve pro rata rights by being particularly helpful to the entrepreneur. 

Equity dilution is a common occurrence that impacts many private market investors in high-growth companies.  

The reason comes down to a natural characteristic of technology companies that choose the venture capital route: startups require outside capital to grow rapidly in order to spend on product innovation, control certain markets, and beat out competition.  

With that said, not all dilution is bad. As a company takes on additional outside funding and uses the capital to increase revenue and service new customers, the overall valuation of a company can increase significantly. Ultimately, owning a smaller percentage of a high-value company can still be more lucrative than owning a larger percentage of a relatively smaller company. 

Raising outside capital can be an integral part of a company’s business model as long as it is done responsibly alongside sustainable growth rates and a path toward profitability. 

Zest can help founders present information and communicate transparently with their shareholders, all while streamlining their cap table. 

Equity dilution occurs when a company issues new shares of stock to investors, decreasing the ownership percentage of existing shareholders. 

How Equity Dilution Impacts Investors 

It’s no surprise that investing in the private markets is a relationship business. After all, private market investing is often referred to as an “access class.”

The best managers build strong, lasting relationships with their investors over the course of many years, and often decades. These relationships pave the way for future fundraising, portfolio company support, deal flow, and so much more. 

How do managers nurture lasting relationships with their investors? There is one key component to attracting and retaining long-lasting relationships - it’s the art of communication 👇

How strong communication skills can impact your investing business

One of the most effective ways to get your investors to trust you as a manager is through frequent and transparent communication.

As an emerging manager with a limited track record of performance, sharing your perspective on the investing landscape, updates on your portfolio companies, and thoughts on new trends and technologies can help potential investors get to know you better and understand your unique perspective as a manager. 

Building trust through communication creates the foundation for a strong relationship with investors, leading to future fundraising opportunities and investment support.

What should an investor communication strategy look like?

Managers face several decisions when creating their investor communication strategy. 

What should I include in my communications? Do they even want to hear from me?

Although the cadence and depth of communication vary greatly by manager, both syndicate leads and fund managers follow a general formula. 

How syndicate leads communicate with their investors

For syndicate leads, there are three key timeframes that comprise a manager’s communications strategy. 

In the weeks leading up to the offering period of a syndicate deal, a manager will want to share their thesis on the company, often referred to as a “deal memo,” which includes market commentary, product analysis, team overview, risks, and more. 

The goal here is for the manager to relay their full thoughts on the prospective investment opportunity with their investors in order to give them a chance to participate in the offering. 

Keeping an open line of communication during the fundraising process is key. 

Oftentimes, key deal terms of the offering can change during the fundraising process, including other co-investors, pro-rata rights, the size of your allocation, and more. Investors should always have the most up-to-date information on the offering so they can make their own investment decisions based on all available information.

After the offering closes, the real work begins. Now, the company has accepted your investment and will typically update the syndicate lead on a monthly or quarterly basis. 

Although this varies, each syndicate lead will decide how frequently to update their investors on the company’s changes. Regardless of how often a manager decides to communicate with their investors, it’s best to keep it consistent so investors know what to expect. Investors will always value consistency.

How fund managers communicate with their investors

Since fund managers decide where to allocate the funds that they manage, there is not as much communication prior to an investment occurring. Rather, fund managers will commonly send investor updates that highlight the activities of the entire fund based on the original investment strategy that the manager raised capital on. 

These investor updates vary in frequency but commonly occur quarterly. Although each fund manager’s investor updates will be different, some important topics to touch on include;

On the topic of transparency, what both syndicate leads and fund managers should keep in mind is that it’s critical to share both the positive and negative updates with their investors.  

Investors look at your relationship as a partnership. In order to have an effective partnership, managers and their investors need to have transparency and trust with each other. 

As a responsible steward of investor capital, managers should make their investors aware of potential risks, and recent updates of any less-than-desirable news. 

Based on where the manager is located, there may be regulatory or fiduciary responsibilities to abide by as well with respect to the manager’s communication strategy. Additionally, managers should always be cognizant of company confidentiality. Throughout the course of investing in private companies, managers will come across many instances of data and privacy concerns that company executives do not want you to share with others, including your investors. 

Who should managers be communicating with?

It’s pretty obvious that managers should be communicating with their investors, but it doesn’t stop there. 

As a fund manager, when you’re not investing capital, you’re probably thinking about raising capital. Bringing new LPs into your syndicate or fund allows you to continue investing in startups and growing your investment business. Because of this, much of your job is “selling” or pitching new investors. 

So while you have a responsibility to communicate with your existing investors, it’s also in your best interest to communicate with prospective investors as well. You’ll want to send them updates, albeit slightly different than your regular updates, to keep them aware of what’s going on, the progress you’ve made, and how you’re thinking about the future market conditions and future fundraising. 

Without this, you’ll have a much harder time raising follow-on capital from new investors. 

Lastly, managers should be sharing their thoughts with their larger community. 

There’s no way to know for sure the number of potential investors or founders that you aren’t yet connected with. By sharing consistent content with the broader public, you’re able to open up potential relationships with people who want to be part of your work, whether it’s a future investor, partner, or founder that you’re investing in.

Why your communication strategy should be a key pillar of your investing business

When you decide to raise investor capital, you begin a partnership that will likely last many years, if not decades. 

Maintaining a healthy partnership requires open and transparent dialogue regarding the happenings within your investing business. 

Importantly, the more you communicate with your investors, the more opportunities you give them to help you. This is a significant reason to lead with open communication. Your investors are there to support your partnership, and the more they know the more they can support you.

This includes, but is not limited to, new introductions and deal flow opportunities. By forging strong and transparent relationships with your investors, you are more likely to attract new opportunities and high-quality deal flow, growing your investing business sustainably over time. 

As a manager, dedicating time to planning your communication strategy will pay dividends as you build enduring relationships with your investors and educate the broader community on your investing thesis. 

 makes it easy for emerging managers to digitize their SPV setup process and manage their administrative tasks.

Having a communication strategy with your investors can positively impact your investment business. In this article, we outline how to build trust with your investors, what a successful communication strategy looks like, and why your strategy shouldn't end there.

Why Communication is Important for Running a Successful Investment Business

Running a company is hard work. Whether you’re a high-growth startup or an existing enduring business with stable cash flow and customers - business leaders are tasked with making key decisions at every turn. 

Most day-to-day decisions are left for the senior executives of the company to decide. However, some decisions are so impactful to the company, that the company’s investors or board members may want a say. 

Companies around the world use a structure called “reserved matters” to identify certain situations that would require approval from a specific group of people at the company, often requiring a minimum number of Board Directors or a specified ownership percentage of the preferred shareholders. 

In the US, there's been a notable decline in the utilization of board and shareholder reserved matters as a means of exerting control over company decisions, however, these mechanisms continue to play an important role if utilized effectively.  

But what are reserved matters exactly and what do they mean for companies?

Reserved matters are meant to protect the interests of certain stakeholders on certain decisions, outlined by a set of key decisions that must be made with the approval of a select group of board members or shareholders. Reserved matters can include decisions like changing the rights of existing shares of the company, approving the business’ annual budget, or changing the company’s auditor. 

These reserved matters are outlined in the company’s shareholders’ agreement or other investment documentation when the company raises capital from new investors - a topic that is often negotiated with a lead investor. These are important clauses to focus on given the impact they may have on decisions within the company.

There are generally two types of reserved matters: Shareholder Reserved Matters and Board Reserved Matters. We’ll get into both below 👇

Shareholder reserved matters are intended to protect the interests of the shareholders of the company. These protections are commonly negotiated between the lead investors of a fundraising round and the company. The importance of determining which circumstances qualify as shareholder reserved matters is significant in the negotiation process as these are meant to de-risk part of an investor’s consideration for investing in a company. Shareholder reserved matters can include, but are not limited to:

These are only a handful of the many shareholder reserved matters that a company and its investors may agree upon. Shareholder reserved matters are events that typically impact the company’s capitalization table or the characteristics of an investor’s shares. 

Board reserved matters are intended to protect the interests of the company itself. These reserved matters require the approval of the majority of elected board members and can include a number of different circumstances, including:

These reserved matters represent only a subset of the possible board reserved matters that companies might have. Most board reserved matters relate to any financial or business matters that may impact the health of the company. 

Reserved matters are intended to improve the governance practices of a corporation. By requiring approvals from specific groups of a company’s stakeholders, executives can ideally better manage the risks of all parties involved while running an organization. 

However, sometimes reserved matters can result in the opposite outcomes than originally intended. They can, at times, inadvertently slow down the decision-making process and progress at a company, 

“Deadlock” is when a group or person uses their power to stall a major decision by withholding an affirmative vote. In board reserved matters, this can be the case when the minority-represented board member vetoes a given decision, “deadlocking” the decision-making process and slowing progress at a company. 

This circumstance is often preemptively addressed in investment documentation to limit the number of failed board votes that a company can have to a maximum of two meetings before requiring the board to act in good faith to resolve the matter at hand.

Other unintended consequences include a single person or group of stakeholders exercising too much control over a particular matter. Without thoughtful consideration while drafting your reserved matters, it’s possible that certain stakeholders could end up with unnecessary leverage over certain decisions.  

As a rule of thumb, reserved matters should only be used to protect an investor’s interest and risk. It’s a balance between encouraging sustainable growth and empowering the company to lead.

Balancing governance with effective decision-making

All companies have governance considerations when it comes to making both day-to-day and long-term business decisions. As a bootstrapped entrepreneur, these decisions are fairly simple as they typically come down to just the opinion of one person. 

When an entrepreneur decides to raise investment capital, the governance topic becomes even more important as a company now has more stakeholders involved in its existence. 

An effective governance structure is one that fairly represents the stakeholders involved in a business to arrive at the most optimal decision-making outcome.  

It’s crucial to practice good governance hygiene in a way that allows companies to make decisions quickly when necessary and remain nimble, particularly in startup businesses. 

What does this mean? Entrepreneurs and investors should think deeply about which reserved matters are good for a startup business and which would be unnecessary and slow down a company’s ability to act swiftly.

On the other hand, businesses with strong, stable cash flows that have been around for a long time may benefit differently from a longer list of reserved matters. 

Every business will have unique characteristics that call for varying consideration of its reserved matters.

The goal is for an entrepreneur and investor to come to an agreement that optimizes governance hygiene while empowering the business to operate in the best way possible. 

Deciding on which set of governance decisions should be identified as reserved matters can be confusing. It’s always advised to speak to your legal team when drafting transaction documents. 

 is digitizing private market transactions, building tools to streamline how entrepreneurs, funds and investors transact. Our platform is designed to save you time and reduce administrative costs, simplifying the end-to-end investment process.

Reserved matters are a type of protective provision outlined in investment documentation that explains which corporate decisions need to be approved by a select group of people.

Reserved Matters: What You Need To Know

Investing in the private markets as a first-time (we’ll refer to as ‘emerging’) manager can be daunting. 

Managers are responsible for finding the right opportunity, building investor relationships, and raising capital, all while maintaining the tedious work of collecting documentation, coordinating investor KYC, and many more administrative tasks.

Below, we’ll dive into how emerging managers operate their investment businesses, different options for structuring a capital raise, the role that emerging managers have in the MENA ecosystem, and more. 

But before we discuss the “how”, let’s begin with the “why” 👇

The MENA region has seen an increase in investment activity in the private markets over the years with a growing number of venture capital and private equity fund managers actively allocating funds in new private market investment opportunities. 

There is much more room for growth as the private market ecosystem continues to mature in the MENA region and new emerging managers enter the market. This is especially true in the current period, where investor appetite is increasingly focused on MENA. 

That being said, however, factors like information asymmetry, uncertainty surrounding liquidity, and lack of price discovery mechanisms make building a solid thesis and raising capital from investors challenging. A fund manager’s track record and access play a significant role in bringing that trust. 

We’re here to demystify raising capital in the private markets and outline some common options for starting and scaling your investment business.

Emerging managers have various pathways for raising capital from investors in the private markets. The two most common approaches are:

Emerging managers can raise capital through a fund, which allows them to group investor capital into a legal vehicle (fund structure) and invest that capital across a variety of investment opportunities within a pre-agreed investment strategy. 

When raising a fund, emerging managers approach their network and raise capital from prospective investors based on their investment strategy. Their strategy will typically address the stage of the companies they’ll invest in, the sector that the companies operate in, as well as the fund’s target investment size, number of investments, and more. 

Investors then have to make an investment decision based on the fund manager’s investment thesis and how confident they are that the fund manager can select the right set of companies at 

, achieve successful exists and generate strong returns for their investors. 

Raising a fund can take as long as 12-24 months in order for the manager to reach their target fund size, which then will lead to the fund manager calling the first tranche of committed capital and beginning the fund’s investment period. Private market funds often have a lifespan of ten years, which means all investment positions must be distributed either in cash distributions or shares in-kind.  

A fund vehicle can sometimes have a complex legal structure and will need to account for supporting entities, for example, a management company and a general partner entity. These additional administrative requirements are important and protect investors, and therefore need to be included in the cost/pricing structure of running a fund. 

On the other hand, emerging managers can raise capital from investors through 

, which allows the manager to group investor capital for a singular investment opportunity (aka, transacting on a deal-by-deal basis). 

When raising capital through SPVs, the manager has already identified the investment opportunity and presents it together with the investment terms to prospective investors. 

Managers who raise capital using SPVs are therefore approaching investors to raise capital for the investment opportunity at hand, and investors make their investment decisions based on the opportunity rather than committing capital based on an investment strategy.

SPVs are legal vehicles used for singular investment opportunities. The lifespan of an SPV varies based on the investment opportunity, but generally follows a similar liquidity profile as a fund, often with a lifespan of 7-10 years.

However, unlike a fund, an SPV’s success in generating an attractive return on investor capital is directly tied to the performance of the single underlying portfolio company and becomes dissolved upon a liquidity event of that company.

Emerging managers often face headwinds when beginning their investing careers in the private markets. Among the hurdles that emerging managers looking to raise capital for their first fund face are establishing a track record of performance and building trusted relationships with their investors.

Building trust with investors and proving their ability to identify and secure allocation in great investment opportunities is paramount for managers to be able to raise a fund. After all, when a manager raises capital through a fund, they’re convincing investors to trust their investment thesis, and their ability to access great opportunities and generate meaningful returns. 

This is where SPVs come in as one of the potential pathways. 

Emerging managers often use SPVs to build their track record of investing in the private markets. Additionally, SPVs offer managers the opportunity to develop their relationships with their investors and prove their abilities to effectively communicate during the fundraising and post-investment period of each investment opportunity. 

Along with developing investor relationships, managers use SPVs as an opportunity to prove their value to portfolio companies and show entrepreneurs why they’d want to have the emerging manager as an investor on their cap table. This improves a manager's odds of securing high-quality deal flow in future opportunities.

Lastly, the costs of setting up an SPV can be much lower than the costs of starting a fund. This allows fund managers to move quickly to start raising capital for an investment opportunity without worrying about expensive overhead and lengthy timelines. 

Throughout the course of raising capital with SPVs, emerging managers have the opportunity to develop a track record of managing investor capital, create a community of investors around their investment business, and show entrepreneurs why they belong on the cap table of the best companies. 

These characteristics are crucial to improving a manager’s odds of success if they decide to raise a fund. Once a manager has developed investor trust and an investing track record, they’re able to showcase their investing history and selection process. 

Why Emerging Managers Are Crucial To The Private Market Ecosystem

SPVs offer the most seamless and efficient way for emerging managers to begin transacting in the private markets. 

The MENA region has been buzzing with activity across the private markets, both from existing funds as well as the emergence of new managers raising and deploying capital into investment opportunities. 

The increase in capital being raised and deployed leads to an increase in the number of entrepreneurs starting companies. This is a flywheel that continues to benefit each party as investors and entrepreneurs build the private market ecosystem in the MENA region. 

Zest is digitizing private market transactions, building tools to streamline how entrepreneurs, funds, and investors transact. Our platform is designed to save you time and reduce administrative costs, simplifying the end-to-end investment process.

Disclaimer: this is an informative post, and should not be considered in any way or form as legal advice or recommendation to use funds or SPVs.

Navigating the private markets as an emerging manager can be daunting. In this article, we attempt to demystify investing in the private markets and outline options for starting and scaling your investment business.

The Emerging Manager Playbook For Navigating The Private Markets

Special Purpose Vehicles (SPVs) describe legal entities commonly used by founders and investors in the private markets to transact efficiently and seamlessly. Below, we’ll explain what they are, why they’re used, and how they benefit the private market ecosystem.

Special Purpose Vehicles (SPVs) were originally created as a mechanism to separate financial risk from a parent company. The SPV would act as a separate legal entity with its own asset and liability structure to ensure that its activities would not affect the financial health of the parent company and vice versa. SPVs have been used for a variety of reasons across the financial landscape, including asset transfers, securitizations, property sales, and more. 

In venture capital investing, SPVs have been commonly used as a way to group investor capital under one entity to make a singular investment in a start-up.

SPVs can adopt different legal structures based on the intent of the entity, and the jurisdiction in which the entity is created.

Special purpose company (SPC) vs special purpose entity (SPE) vs special purpose vehicle (SPV)

These naming conventions, albeit slightly different, all describe the same type of entity - which as described above, was originally created as a mechanism to separate financial risk from a parent company. In venture capital, this type of entity has been commonly used as a way to group investor commitments under one entity to make a singular investment in a start-up.

Occasionally, a manager will set up a single SPV entity to make an investment without any intention of creating future SPVs for subsequent investments. In this case, it may make sense to set up a single SPV. 

However, managers often have the intention of wanting to create SPVs for several different investment opportunities, particularly if they intend to use SPVs as a way to build their track record and grow their investing practice. In this case, setting up a 

A Series structure allows a manager to create subsequent entities with a single filing, known as a

entity, and without additional registration. By doing this, a manager is able to quickly spin up future SPV entities under the same

SPVs can be created around the world. Based on local and national regulations, the exact legal entity for an SPV can vary. 

For example, SPVs that are created in the United States are often set up as either limited partnerships (LP) or limited liability companies (LLC) and are commonly registered in the state of Delaware. Common jurisdictions also include the Cayman Islands, British Virgin Islands, and in the MENA region, Abu Dhabi Global Market (ADGM) and the Dubai International Financial Centre (DIFC) zones, and can be designated as LLCs or exempt companies. 

A Series structure in the state of Delaware is set up as Series LLCs or Series LPs, while a Series structure domiciled in the Cayman Islands is set up as Segregated Portfolio Company (SPC), under which Segregated Portfolios (SPs) are created. This is what we use at Zest to create SPVs. In the ADGM and DIFC, these Series structures are often designated as Cell Companies.

What’s the difference between an SPV and a fund?

Funds are entities that are created to pool investor capital, which is then managed by a General Partner who has the discretion to allocate the capital from their investors (Limited Partners) across investment opportunities within the mandates of their Limited Partner Agreement (LPA). As a General Partner, when you raise a fund, you are selling your investment strategy to prospective LPs that you will plan to implement once you’ve raised capital and conducted your first closing of the fund - this can often take up to 24 months or longer when raising a fund. 

On the other hand, an SPV is often formed to group investor capital for one specific investment opportunity. As a General Partner of a Fund, creating a dedicated SPV means that you are selling the investment opportunity at hand when raising capital from LPs. The fundraising timeline for an SPV is often much shorter than it is for a fund, as a manager is looking to raise and deploy the capital into the investment opportunity quickly. SPVs are also formed by business owners (founders) or syndicate leads to invest in a single company alongside their network of investors.

How have SPVs impacted the venture ecosystem?

SPVs are used in the venture ecosystem for different reasons. 

Founders of companies have benefited tremendously from the growth in popularity of SPVs. Specifically, founders use SPVs for the following reasons:

Founders use Zest to simplify their cap tables during or even after their fundraise.  

Syndicate leads and fund managers utilize SPVs for a variety of purposes in the private markets. Key benefits of using SPVs for deal leads include:

Syndicate leads and fund managers use Zest to digitize their processes and seamlessly set up SPVs. 

Participating investors take advantage of SPVs as part of their investment strategy for several reasons, including:

Investors benefit from Zest’s mission to increase transparency and digitization within the SPVs they are participating in.

How SPVs will impact private market transactions in the MENA region

SPVs will play a significant role in the development of the private market ecosystem across the MENA region. We believe the use of such vehicles will result in further capital deployment across early-stage and late-stage companies, consolidation of administratively-intensive cap tables for founders, and secondary liquidity opportunities for both investors and founders in the future. With investor interest across the MENA region growing for access to co-investment and deal-by-deal opportunities, we expect SPVs to play a pivotal role in investor activity throughout the coming years.

If you are looking to set up an SPV to group your investors, 

Zest is digitizing private market transactions, building tools to streamline how entrepreneurs, funds, and investors transact. Our platform is designed to save you time and reduce administrative costs, simplifying the end-to-end investment process

Special Purpose Vehicles (SPVs) describe legal entities commonly used by founders and investors in the private markets to transact efficiently and seamlessly.

What is an SPV?

Pre-Money vs Post-Money Valuation, what’s the difference?

When a startup raises money from investors, one of the key considerations that needs to be negotiated is the valuation of the company.

You might be wondering, what does it mean for a company to have a valuation?

Simply put, a company will have a valuation when it issues equity to investors. This is referred to as a “priced equity” round. 

In a priced equity round, investors will give money to a startup in exchange for shares in the company. Each share will have a value, known as “price per share (PPS)”; therefore, the company as a whole will be valued based on the number of outstanding shares and the agreed-upon PPS. 

A company’s valuation has tremendous implications for both the investor and the company’s existing stakeholders affecting how much an investor will acquire for a given investment, as well as dilution of existing shareholders, the company’s future growth trajectory, subsequent financing rounds, and more.

Valuation can be measured in terms of ‘pre-money” or “post-money” valuation - the difference comes down to when to value new investor capital.

Below, we’ll dive into the differences between these two valuation frameworks and explain why each one is used.  

A company’s pre-money valuation is the equity value of a company immediately prior to a new investor’s investment. This valuation does not include any investments made in a current financing round. 

This valuation is agreed upon by the investor and company and is often highly negotiated between the two parties. Valuations are ultimately the combination of market forces, comparative fundraising rounds, and a company’s growth rate, among other factors. Rather than being an exact mathematical calculation, a start-up’s valuation involves many discussions and is typically quite speculative.

How does a company’s pre-money valuation impact current and existing investors?

A company’s pre-money valuation has the largest impact on the price per share (PPS) calculation that investors will be purchasing company equity at. All else equal, a company’s pre-money valuation and the PPS are directly proportional - as one value increases, so does the other. This determines how many shares an investor will own for their investment, the portion of the total company the investor will acquire, and all other shareholder’s relative ownership after a financing round is conducted. The higher the pre-money valuation (and therefore, the PPS), the less that existing shareholders will be diluted. The opposite is also true. The next largest impact on the PPS that investors will acquire their equity stakes at is called the 

of the company. A company’s fully diluted capitalization is the second factor used to arrive at the PPS that an investor will pay for their shares. The purpose of this metric is to consider any and all existing shares, as well as any and all shares authorized to be issued in the future. The PPS and fully diluted capitalization are indirectly proportional - as one increases, the other decreases.

Exactly what is included in the fully-diluted capitalization of a company will be a negotiated topic between the investor and the company as this will directly impact the PPS which influences all relative ownership interests after a financing round. 

The post-money valuation represents the valuation of the company inclusive of the invested capital from the new financing round. The post-money valuation can tell an investor their exact ownership percentage in a company based on their investment. This valuation metric is equal to the pre-money valuation plus the amount of capital invested in the financing round. Calculating the post-money valuation is more straightforward than its pre-money counterpart.

Example: If an investor invests $1M in a financing round for a 10% ownership stake in the company, the post-money valuation would be $10M.

Typically, for priced equity rounds, investors will issue term sheets with a pre-money valuation. This makes it clear to the investor and the company what the price per share will be, regardless of the size of the financing round. 

How do priced equity valuations affect SAFEs?

At the earliest stages of a startup’s journey, it’s uncommon for a company to raise money at a priced equity round. Determining the equity valuation of a company at this stage is a difficult task given startups at this stage often have minimal traction and unproven business models. 

Instead, companies often raise capital using an instrument called a Simple Agreement for Future Equity (SAFE) - a promise to give investors equity shares of your company at a later date once an equity valuation is determined. 

SAFEs are also issued using a pre-money or post-money framework. 

Understanding key investment terms can be daunting. We outlined two important ways to measure a startup’s valuation.

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