Most growth rounds mix new shares for the company with existing shares bought from founders and early holders: the blended entry price, the ownership it buys, and the downside the cheaper common shares carry.
The investor's entry price in a mixed round is the total invested divided by the total shares bought, not the round price. In an illustrative round at 10.00 a share, 60.0 of primary and 40.0 of secondary bought from founders at a 20 per cent discount buy 11.0m shares at a blended 9.09 a share, 23.91 per cent of the company, not the 21.74 per cent that 100.0 over a 460.0 post-money suggests. The extra ownership is paid for in the downside: the secondary shares are common.
Worked in full in The Growth Equity Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Growth rounds are rarely all new money. Founders and early investors want liquidity, the company needs less cash than the investor wants to deploy, and the gap is filled by buying existing shares. The term sheet quotes one valuation; the investor actually buys at two prices and into two places in the capital structure.
| Input | Value |
|---|---|
| Pre-money valuation | 400.0 |
| Fully diluted shares before the round | 40.0m |
| Primary: new preferred, 1x non-participating | 60.0 |
| Secondary: existing common bought from founders | 40.0 |
| Discount on secondary to the round price | 20% |
Step 1: the two prices. The round price is 400.0 ÷ 40.0m = 10.00 a share. The secondary price is 10.00 × (1 − 20%) = 8.00.
Step 2: shares bought. The primary buys 60.0 ÷ 10.00 = 6.0m new shares. The secondary buys 40.0 ÷ 8.00 = 5.0m existing shares. The share count rises only by the primary, to 46.0m, and the post-money is 460.0.
Ownership = (6.0 + 5.0) ÷ 46.0 = 23.91%
Blended price = 100.0 ÷ 11.0 = 9.09 a share
That is 9.1 per cent below the round price, and an implied post-money of 9.09 × 46.0 = 418.2 rather than 460.0. In Excel: =(Primary+Secondary)/(Primary/Price+Secondary/(Price*(1-Disc))).
Step 3: compare with an all-primary round of the same size.
| Structure | Cash to company | Post-money | Investor ownership | Existing holders |
|---|---|---|---|---|
| All primary | 100.0 | 500.0 | 20.0% | 80.0% |
| 60.0 primary + 40.0 secondary | 60.0 | 460.0 | 23.91% | 76.1% |
The mixed round buys 1.196 times the ownership for the same money. But the two pieces are not the same security. The 6.0m primary shares carry a 1x preference on 60.0; the 5.0m secondary shares are common and are paid only after it. That is what the 20 per cent discount is for, and the exit table shows whether it is enough.
| Exit equity | Primary | Secondary | Mixed total | Mixed MOIC | All primary | MOIC |
|---|---|---|---|---|---|---|
| 200 | 60.0 | 17.5 | 77.5 | 0.78x | 100.0 | 1.00x |
| 300 | 60.0 | 30.0 | 90.0 | 0.90x | 100.0 | 1.00x |
| 380 | 60.0 | 40.0 | 100.0 | 1.00x | 100.0 | 1.00x |
| 460 | 60.0 | 50.0 | 110.0 | 1.10x | 100.0 | 1.00x |
| 800 | 104.3 | 87.0 | 191.3 | 1.91x | 160.0 | 1.60x |
| 1,200 | 156.5 | 130.4 | 287.0 | 2.87x | 240.0 | 2.40x |
Below the conversion point, the preferred takes its 60.0 first and the 40.0m common shares share what is left. At an exit of 300.0, each common share is worth (300.0 − 60.0) ÷ 40.0 = 6.00, against the 8.00 paid. The all-primary investor, fully covered by its 100.0 preference, gets its money back. The two structures cross at an exit of 380.0:
60.0 + 5.0 ÷ 40.0 × (V − 60.0) = 100.0, so V = 380.0
Above 380.0 the mixed round wins, and the gap widens with the exit: 0.47x at 1,200.0. Below it, the cheaper common shares cost money. The question for the investment committee is therefore not whether a 20 per cent discount is "enough", but how likely an exit below 380.0 is, which is below the 400.0 pre-money the round itself sets.
The comparison holds the exit value constant, which flatters the mixed round: the company receives 40.0 less cash to fund its plan. If that money was needed for growth, the exit value should be lower in the mixed case, not the same.
The same round looks different from each seat. The founders and early holders who sell receive 40.0 in cash for 5.0m shares, a 20 per cent discount to the price at which the company is announced as valued. The company receives 60.0, not 100.0, and must fund its plan with that. The existing holders as a group end with 76.1 per cent rather than the 80.0 per cent an all-primary round would leave them, because some of them sold. Each of those trades is reasonable on its own; the investor's job is to make sure the discount on the secondary is priced against the waterfall, not against the press release, and that the company is not left short of the cash the growth plan assumes.
Blend the prices to get the entry: 100.0 for 11.0m shares is 9.09 a share and 23.91 per cent. Then run the waterfall with the secondary as common: the mix beats all-primary above an exit of 380.0 and loses below it. The ownership and follow-on arithmetic of the book's own case is in the free workbook for this book.
The part of the investment that buys existing shares from founders, employees or early investors, so the money goes to the sellers and not the company. In the illustrative round, 40.0 of a 100.0 investment is secondary: the company receives 60.0 and the post-money is 460.0, not 500.0.
Because they are usually common shares without the liquidation preference of the new preferred. In the illustrative case the 5.0m secondary shares bought at 8.00 are worth only 6.00 each at an exit of 300.0, while the preferred is repaid in full. The 20 per cent discount pays for that position in the stack.
Above a certain exit, yes, because it buys more of the company for the same money: 23.91 per cent against 20.0 per cent all primary, so 2.87x against 2.40x at a 1,200.0 exit. Below an exit of 380.0 it does worse, as the common shares absorb losses the preferred would not.
This article is one calculation from The Growth Equity Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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