Things get a little bit more complicated when we're setting up this series A capital round in this cap table. This is because not only is there a series A capital round, but also the company is going to set up an employee stock option plan at the same time as the series A capital round happens to help convince those investors that the key employees are gonna stick around within the company. So there's a two stage approach we need to go through here. First of all, we need to allocate shares to the employee stock option pool, and then secondly, we need to have the actual series A capital round. So let's go down and have a look at the assumptions we've got here. If we go down to row 44, we can see that the first step in the series A capital round is that we want to set up the employee stock option pool to attract and retain those key employees, and we want those employees to have 10% of the shares of the company after the series A round.

Now, because the series A rounds, if we go a little bit further down, is going to be for 20% of the ownership of the company, we need to allocate shares to the employee stock option pool, such that after they're diluted by 20% with the subsequent series A rounds, they then own 10% of the shares in the company. So we need to gross up this 10% to account for the subsequent 20% dilution that's gonna come later. And we do this by taking the post series a capital round percentage of the ESOP of 10% and dividing it by one a minus the percentage allocated to the series A investors.

This shows us that we need to create shares for the employee stock option pool of 12.5% of the share capital of the company. This will then be diluted when the series A capital round happens down back to 10%. What does this mean for the other shareholders, the founders, the early employees, and the seed investors. While they're gonna experience dilution of 1 minus the 12.5% shares that are gonna be allocated to the employees to option pool, they will then only own 87.5% of the business that together those investors previously owned 100% of. So to calculate the ownership stake that the founders early employees and seed investors will have after these new shares are created and allocated to the employee stock option pool, which will then account for 12.5% of the business. We just need to take what the founders initially had before the 83.3% and multiply it by the 87.5% ownership stake that they'll have afterwards. So that's the bit of the business that all of these investors together will own after enough shares are created to give the employee stock option pool 12.5% of the business. To enable me to copy this down for the other three rows, I'm gonna hit F4 to lock onto it and then we can apply the same calculations to the early employees, seed investors and founders as well. Okay, so we're now saying that the other investors that previously had 100% of the business now only have 87.5% of the business because the other 12.5% is going to be owned by the ESOP and this does total up to 100%. We can take these numbers and put them into the cap table. So the founders now have 72.3% of the business and we can copy this formula down to get the ownership percentage held by the other existing investors in the business. And also we can copy it down to pick up the shares owned by the ESOP. The percentage of shares owned by the ESOP, not a huge surprise that again, if we copy this formula to the right for the dilution effect, we can see that there is a 12.5% dilution experienced by all the initial investors before the ESOP was set up because the ESOP now has 12.5% of the shares of the company.

The second step here now is to actually go through the series A capital round. The series A capital round just requires us to create an extra number of shares that accounts for 20% of the business after the shares have been created. So to see what the other investors have, all we've got to do is multiply the stake that they had previously by 1 minus the 20% stake that will then be owned by the series A investors. For the founders, we take what they now have, the 72.8% and multiply it by 1 minus 20%. Again, if we lock onto that by hitting F4, we can then copy the formulas down. Gotta be a little bit careful here in terms of how we set the table up. The ESOP is now at the bottom here. The series A investors will have a 20% stake in the company and the stock options, which were allocated at 12.5% of the company, which now get diluted by 20% like every other investor at this stage now gets us back to the ESOP having a 10% stake in the company, which was our aim all along. We can now put these numbers as well up into the cap table and we'll see that these two stages result in further dilution for the founders.

So the founders now have a 58.3% stake in the business. So having grabbed all of these data points from where we calculated them lower down, we can see that the founders had 83.3% in the business before the series A capital round. But because of the creation of the ESOP which created dilution of 12.5% and the then subsequent 20% dilution coming from the series A capital round, the founders now only own 58.3% of the business. This does demonstrate some quite extensive dilution the founders will have experienced, but hopefully they'll feel That owning 58.3% of a business that has that series A financing will lead to a higher valuation for them than owning the 83.3% of a business without the Series A financing.