The Price of Equity in Biotech: Why “Valuation” Doesn’t Tell You Your Share Price

Founders think “valuation” is a number. It’s actually five different numbers, and only one of them is your money.

Biotech fundraising is where valuation models meet venture contracting reality. Intrinsic valuation is an auditable model of expected enterprise value under explicit assumptions; “equity price” is the negotiated price of a specific security sitting inside a capital stack with seniority, conversion rules, and payoff shaping. These are different objects, and the gap between them is where founders lose money at exit.

What follows is a four-part, reader-ready manual that connects INBISTRA’s valuation framework (S0, rNPV, ROA) to the mechanics founders face in pre-seed, seed, Series A, and beyond.

Figure 1. From INBISTRA valuation to equity price (and to founder proceeds). INBISTRA valuation inputs (S0 built as a glass box, and program value computed via rNPV and/or ROA) do not directly determine founder cash. Financing terms translate valuation into a priced security via pre/post-money framing and the fully diluted denominator, while the liquidation waterfall determines who gets paid and when. The preference stack (K_senior) is the economic “strike” above which common equity begins to receive proceeds.

Part 1: The “Price of Equity” Problem: You Are Not Pricing One Thing

In biotech fundraising, founders often say “the valuation is wrong,” but what they are actually experiencing is more precise: they are experiencing a mismatch between a model of intrinsic enterprise value and a negotiated price for a particular security inside a capital stack. Those are not the same object, and the market is under no obligation to make them coincide.

This isn’t semantics. In pre-revenue biopharma, the difference is structural: a company’s economic future is a sequence of gates where information arrives discretely, optionality is real, and failure is common. The INBISTRA series has already made the case that the correct starting point is to treat valuation as a toolkit: move from NPV to rNPV (explicit PoS-by-stage), and then to distributional and flexibility-aware methods (Monte Carlo / rpNPV and ROA) as uncertainty and managerial choice become first-order drivers [1]. It also argued that the core “underlying” commercial value input (S0) must be a glass box (auditable assumptions rather than a black-box number) because otherwise valuation becomes unfalsifiable storytelling [2]. And it warned that platform narratives need two-layer discipline (Layer A program values plus Layer B platform optionality) rather than “premium by assertion” [3]. Finally, it emphasized that real options are the finance language of stage-gated R&D, where the option premium is literally the price of flexibility under uncertainty [4].

All of that is the intrinsic valuation side of the house. Fundraising, however, is the collision of that house with a second one: venture finance mechanics.

The reason founders feel “confusion” is that one word (valuation) is being used to describe at least five different things.

The goal of this part is to name them clearly, then lay down a translation map from valuation work (rNPV/ROA/S0) to the actual price of equity a founder must live with.

1.1 The five objects that get mixed up (and why the mix-up is expensive)

Most founders think they are negotiating a number. In reality, they are negotiating a vector: price, dilution, seniority, and control. If the headline number is the only thing being negotiated, only one coordinate in a multi-dimensional contract is being negotiated.

Here are the five objects that commonly get conflated.

Object A: Intrinsic enterprise value (what a valuation model is trying to estimate)

This is the “value” implied by an rNPV/ROA framework: the expected present value of a biotech asset or portfolio under explicit assumptions about S0, development costs/timelines, PoS-by-stage, discounting, and (if using ROA) volatility and the value of flexibility [1][2][4].

Intrinsic enterprise value is a decision-support tool. In a high-uncertainty domain, it should usually be expressed as a range or distribution.

The INBISTRA framing is particularly useful because it forces two disciplines that fundraising punishes you for ignoring.

First, it forces auditability: S0 must be a glass box [2]. Second, it forces stage discipline: it separates “risk of failure” (PoS and jumps between gates) from “cost of capital” (discounting), rather than compressing everything into one discount rate and then pretending the output is precise [1]. Those two disciplines matter because investors don’t disagree with a spreadsheet; they disagree with priors, implied update rules, and credibility under audit.

Object B: Financing valuation (the negotiated “pre-money” and “post-money” numbers)

This is the number on the term sheet. It is a negotiation anchor.

Two points make it slippery.

First, “pre-money” is defined inside legal documents that specify capitalization definitions. The venture industry uses standard templates precisely to pin down these definitions and rights: pre-money valuation, option pool, liquidation preference, conversion, anti-dilution, and more [5][6]. Once model term sheet language is read, it becomes obvious that “pre-money” is inseparable from a set of deal definitions: what counts as fully diluted shares, whether the option pool is increased before pricing, what convertibles are included, and so on [6].

Second, even if the headline number is “agreed,” what founders experience economically is the price per share and the resulting dilution. Which leads to the next object.

Object C: Price per share in the round (the mechanical price of preferred)

This is what the investor actually pays per share for the new security in a priced round. It is mechanically computed from the pre-money valuation divided by a share count defined on a fully diluted basis.

Even at this stage, it’s already easy to be fooled: the same €X pre-money can yield meaningfully different prices per share depending on whether the option pool is created pre-money, and depending on how “fully diluted” is defined in the term sheet and definitive documents [6]. The word “valuation” makes it sound like one number; the math makes it a ratio.

Object D: Economic value of common equity (what founders and employees effectively own)

Founders and employees mostly live in common equity and options on common. Investors usually buy preferred.

Common is a residual claim. Its payoff profile is shaped by the preference stack and any senior claims. That means the economic value of common can be dramatically lower than what would be naively inferred from “post-money valuation × common ownership.”

This is the heart of why “valuation vs price of equity” is a capital stack issue: preferred terms can shift downside protection and even some upside away from common, changing common’s expected value without changing the headline valuation.

Object E: “Price of equity” for founders (the lived cost of raising money)

This is what actually matters: what is paid (in dilution, seniority, and future constraint) to buy enough time to reach the next gate.

It is not just the price per share. It includes at least the dilution suffered now (including option pool effects), the senior claims added above common (liquidation preferences and participation), the governance/control conceded, and the path dependency created for future rounds.

The correct mental model is: a financing round is a transaction that buys the company runway and buys investors a shaped claim on uncertain future states.

Once this is accepted, the right question becomes: how does intrinsic value translate into a financing instrument whose terms determine founder outcomes?

1.2 A translation map: from S0/rNPV/ROA to equity price and founder economics

To make valuation useful in fundraising, a map is needed that connects intrinsic valuation outputs to the mechanics investors negotiate.

Step 1: Build S0 as an auditable success-case commercial PV

S0 is the present value of post-launch cash flows conditional on success. In INBISTRA’s framing, S0 must be a glass box, otherwise it becomes a rhetorical device rather than an input [2]. In practical terms, S0 should expose price corridor, adoption archetype, geography/access lags, LOE erosion, and other value-critical assumptions [2].

A black-box S0 increases perceived model risk, which tends to surface either as a lower financing valuation or as tougher terms.

Step 2: Convert S0 into an intrinsic program value via rNPV and/or ROA

rNPV takes S0 and stage-gates it by PoS-by-phase, subtracting development costs and discounting appropriately [1].

ROA explicitly prices flexibility: investment is staged and conditional on information arrival, creating convexity under uncertainty (option premium) [4].

Step 3: Translate intrinsic value into a financing valuation corridor (not a point)

The identity “intrinsic value = pre-money” usually fails because intrinsic value is conditional on assumptions while financing valuation is conditional on market risk appetite and financing risk; because investors often price rounds from ownership and return constraints; and because terms can carry much of the true economics even when the headline valuation is high [6][9].

Step 4: Convert financing valuation to price per share using the fully diluted denominator

At this step, valuation becomes arithmetic:

where “fully diluted” is defined in the documents [6].

Step 5: Translate price per share into economics by modeling the capital stack (not just ownership)

Preferred share rights reshape payoffs. Without a waterfall analysis under plausible exits, financings cannot be compared on an economic basis [6][10].

Part 2: Cap Table Algebra: The Denominator Is the Negotiation

If Part 1 was about vocabulary, Part 2 is about mechanics. This is where “valuation” stops being a story about discounted cash flows and becomes a ratio that is sensitive to definitions.

The most useful mindset shift is this: in a priced round, the headline pre-money is rarely the thing that is truly being negotiated. The negotiation is about price per share, and the price per share is determined by a denominator that can move.

That denominator is “fully diluted shares,” and “fully diluted” is a contractual definition. Once that is absorbed, a large fraction of fundraising confusion disappears.

2.1 The two invariants of a clean priced round (and when they stop being true)

In a simple priced equity financing (no trickiness, no post-close share creation), two identities hold and are worth treating as invariants.

The first is definitional: post-money valuation equals pre-money plus new money. This is the basic pre/post distinction used in practitioner explanations of private-company valuation math [7][8].

The second identity is the translation from valuation to price. In venture terms, the “price per share” is computed as:

where Shares_{FD, Pre} is the fully diluted capitalization as defined for pricing (and explicitly described in the term sheet and definitive documents) [6][8].

Once p is defined, everything else is mechanical:

And if the round’s capitalization is “clean” (i.e., shares are not added after p is set), the investor’s post-money ownership is:

Where these invariants break is exactly where founders get surprised: when the definition of fully diluted shares shifts (option pools, convertibles, warrants, or “post-money” pool constructs that mint shares after pricing). When the denominator moves, headline valuation numbers keep their rhetorical force, but they stop being reliable descriptors of economics.

2.2 “Fully diluted” is a sentence in the term sheet

The NVCA model term sheet is valuable not because it tells you what to negotiate, but because it makes explicit that financing math is embedded in definitions: what constitutes “capitalization,” what instruments are included on an as-converted basis, and what must exist at closing [6].

A practical way to read “fully diluted” is to split it into three buckets.

First are issued shares: outstanding founder common, any existing preferred (as-converted), and any shares already issued to employees/consultants.

Second are reserved but unissued shares: the option pool. This bucket creates most pre-seed/seed pricing misunderstandings, because “unissued shares” still count in the denominator used to compute p.

Third are contingent shares: convertibles, warrants, and other instruments that may or may not be included in the denominator at pricing depending on how they are defined.

So when someone says “€12M pre,” the founder-grade question is not “is that high or low?” The question is: “€12M pre on what fully diluted basis?” Term sheets and cap tables can make the same headline number represent materially different economics.

2.3 The option pool shuffle: the hidden lever behind “valuation”

Figure 2. The option pool shuffle changes economics even when the headline pre-money is unchanged. Two financings can share the same headline pre-money and raise size yet imply different outcomes for founders because the price-per-share denominator is a contractual definition. Creating or topping up the option pool pre-money expands the fully diluted share count used for pricing and shifts dilution primarily onto existing holders; post-money pool creation shifts dilution more evenly. In practice, ownership targets and pool requirements are the real primitives; the headline valuation is often a derived variable.

Early-stage rounds usually include a requirement for a sufficient unallocated employee option pool post-money. The resulting negotiation is often framed as “we need a 10–20% pool.” The economic question is: who pays for it?

The common structure is that the pool is created or topped up pre-money (i.e., included in Shares_{FD, Pre}), so dilution falls primarily on existing holders rather than new investors.

A pre-money pool effectively changes what “pre-money valuation” means. The headline pre-money is the value of the pre-money cap table including the newly created pool. If the founder’s implied pre-money value is desired, the founder portion must be isolated.

If the option pool is created pre-money, then founders’ implied pre-money value is:

and the pool’s implied pre-money value is:

This makes the “pool cost” explicit: the option pool is an allocation of pre-money value away from founders and toward the future team, priced at the round’s implied price per share.

Practitioner explanations emphasize precisely this point: without the fully diluted share count and the pool convention, pre-money is incomplete as a descriptor of dilution [7][8]. The term sheet is where that convention is made real [6].

2.4 Worked Example A: same headline pre-money, two pool conventions, two different realities

Assume:

• Founders: 8,000,000 common shares outstanding
• New money raised: €4,000,000
• Headline pre-money: €12,000,000 (headline post-money: €16,000,000)
• Target option pool: 15% of fully diluted post-money

Case A (standard): pool created pre-money

Solve:

Solution:

• Pool created pre-money: 2,000,000 shares
• Price per share: €1.20
• Investor shares: 3,333,333
• Post-money fully diluted shares: 13,333,333

Post-money ownership:

• Founders: 60%
• Option pool: 15%
• Investor: 25%

Founder implied pre-money value:

• Founder pre value = €1.20 × 8,000,000 = €9.6M
• Pool pre value = €1.20 × 2,000,000 = €2.4M
• Headline pre-money = €12.0M

Case B (non-standard): pool created post-money

Price the round without the pool in the denominator:

Then create pool shares after pricing:

Post-money ownership becomes approximately:

• Founders: 63.8%
• Option pool: 15.0%
• Investor: 21.2%

Comparison:

The deeper point is: pre-money valuation cannot be interpreted without the pool convention.

2.5 A founder-grade metric: “effective pre-money”

A clean founder-centric metric for comparing term sheets that differ mainly on pool mechanics is:

In Case A, headline pre is €12M but founder effective pre is €9.6M because €2.4M of implied pre-money value is allocated to the option pool.

2.6 Why this denominator logic matters in biotech specifically

Biotech is slow, capital intensive, and gate-driven. That means small differences in dilution mechanics compound brutally across rounds.

Financing is itself staged optionality. A round buys the option to reach the next gate. The cost of that option is not only the cash raised; it is the equity surrendered and the seniority added. If cap table mechanics quietly overcharge early (pool oversizing, repeated pre-money top-ups, sloppy fully diluted definitions), later rounds become harder to finance cleanly.

Part 3: The Liquidation Waterfall: Why a €55M Exit Can Still Mean €0 to €1M for Founders

Now that we know how many shares everyone owns, let’s see what those shares are actually worth at exit.

Cap tables explain dilution. Liquidation waterfalls explain cash.

In venture-backed biotech, the two diverge systematically because investors typically buy preferred equity with contractual seniority. That seniority reshapes who gets paid, when, and how much. As a result, “headline valuation” and even “headline exit value” can be poor predictors of founder proceeds, especially in the outcomes that occur most frequently in drug development: sub-scale M&A, distressed sales, and “good science, insufficient capital/time” scenarios.

This section makes the mechanics explicit and computable, then builds the same company through multiple rounds to show how a preference stack can create a wide region where common equity (founders + employees) is economically out-of-the-money.

3.1 The term sheet is a payoff function

Venture financing documents do more than state a pre-money valuation. They define liquidation preference (the “get paid first” amount), whether preferred is participating, conversion mechanics, seniority among series, and (in down-round risk scenarios) anti-dilution adjustments [6]. In other words, they define a state-contingent contract, an observation that aligns closely with the venture contracting literature [9].

3.2 Common equity is a residual option; the strike is the preference stack

A useful abstraction is to treat common equity as an option-like residual:

Here, K_senior is the contractual senior stack: debt (if any) plus liquidation preferences and other senior claims.

Empirically, the wedge between headline valuations and the economic value of common is not minor. Preference structures can materially alter the economic valuation implied by a financing and founder outcomes at exit [10].

3.3 Non-participating vs participating preferred: two very different payoff shapes

Liquidation preference is already powerful. Participation amplifies its effects.

Non-participating preferred

Non-participating preferred means the investor receives the greater of their liquidation preference L or their as-converted pro rata share x·V_exit [6].

Conversion threshold:

Participating preferred

Participating preferred means the investor receives L and then also participates pro rata in the residual as if converted (often “double dip”) [6].

Participation preserves the upside slope x while adding a constant wedge (1−x)L. In a single-round setting, uncapped participating preferred is strictly more investor-favorable than non-participating across essentially all non-trivial exits.

A cap on participation can exist (e.g., total return capped at 2×), which can eventually push investors back to conversion at high exits.

Single-round illustration (Seed only)

Seed invested L=€4M and owns x=25% (as-converted).

At a €40M exit:

• Non-participating payout: max(4, 0.25×40) = €10M
• Participating payout: 4 + 0.25×(40−4) = €13M

The €3M difference is transferred directly from common to preferred at exit.

3.4 Building the running example into a true multi-round biotech cap table

Figure 3. Multi-round dilution ladder (as-converted, fully diluted). Across Seed → Series A → Series B, founder ownership typically declines steadily as new capital is issued and the employee pool is refreshed to maintain hiring capacity. Dilution is gradual, while proceeds can be discontinuous: once preferences are stacked, common can remain out-of-the-money across a wide region of plausible exits.

The same company is extended across seed, Series A, and Series B.

Assumptions:

• Each round is priced.
• Each round requires the option pool to be refreshed back to 15% post-money (implemented as a pre-money top-up).
• Each preferred class has a 1× liquidation preference.
• Seniority stacks later rounds above earlier rounds [6].

After Seed (post-money €16M)

Seed invested €4M.

After Series A (raise €20M at €60M pre; post-money €80M)

Preference stack: Series A €20M (senior) + Seed €4M (junior) = €24M.

After Series B (raise €30M at €90M pre; post-money €120M)

Preference stack: Series B €30M + Series A €20M + Seed €4M = €54M.

3.5 Two-round waterfall: a €25M exit after Series A can be a ~€0.7M founder outcome

Figure 4a. Exit waterfall at €25M (preferences first). A €25M acquisition can leave a thin residual for common when preferred capital has senior liquidation preferences. After paying the preference stack, only the remaining proceeds are available to common (founders and employee equity). This is why headline ownership percentages and headline exit values can be misleading proxies for founder outcomes.

At €25M, the €24M preference stack is taken (A then Seed). Residual to common is €1M.

Founders’ fraction of common (founders + pool) is:

Founder proceeds ≈ 73.85% × €1M = €0.74M (before expenses and taxes).

If the exit is €24M or lower, founder proceeds are €0.

3.6 Three-round waterfall: a €55M exit after Series B can still be ~€0.7M (or less) for founders

Figure 4b. Exit waterfall at €55M: a multi-million exit can still yield ~€0–€1M for founders. With multiple priced rounds, the preference stack can approach (or exceed) realistic acquisition outcomes. In this example, €55M of exit proceeds sits only marginally above the stacked 1× preferences, leaving ~€1M for common. The waterfall highlights a structural “dead zone” where common is economically out-of-the-money despite substantial historical post-money valuations.

At €55M, the €54M preference stack is taken. Residual to common is €1M.

Founders’ fraction of common (founders + pool) is:

Founder proceeds ≈ 66.67% × €1M = €0.67M (before expenses and taxes).

If the exit is €54M or lower, founder proceeds are €0. This is the math behind why many founders feel blindsided at acquisition: they built something worth tens of millions, and walked away with nothing.

3.7 Re-running the same outcomes under participating preferred

Assume Series A and Series B are 1× participating uncapped, seniority remains B > A > Seed, and Seed remains non-participating.

Case: €55M exit after Series B

Preferences still consume €54M, leaving €1M. With participation, that €1M is shared pro rata among participating classes and common (as-converted).

Founders receive 29.89% of €1M ≈ €0.30M (before expenses and taxes), rather than ~€0.67M under a clean non-participating structure.

Figure 4c. Participating preferred at €55M exit: double-dip erodes founder proceeds. Under participating preferred, investors first receive their full preference stack (€54M), then share pro rata in the €1M residual alongside common. Founders’ slice of the residual drops to ~€0.30M, less than half what they would receive under non-participating terms at the same exit value.

Case: €120M exit after Series B

Residual after preferences: €120M − €54M = €66M.

Founder proceeds under participation: 29.89% × €66M ≈ €19.7M.

Under clean non-participating conversion, founders would receive ~29.89% × €120M ≈ €35.9M.

Participation therefore clips founder upside by ~€16M in this example despite the same exit value and the same as-converted ownership.

Figure 4d. Participating preferred at €120M exit: the “double-dip” tax on upside. At a €120M exit, investors collect €54M in preferences plus their pro-rata share of the €66M residual. Founders receive ~€19.7M instead of the ~€35.9M they would realize under clean non-participating conversion, a ~€16M difference that illustrates how participation mechanics can materially compress founder outcomes even at successful exits.

3.8 Diagnostics that predict founder outcomes better than valuation headlines

Common break-even exit

In the simplest stacked 1× preference world:

In the post-Series B example, the break-even is €54M (plus any debt and transaction expenses).

Preference overhang ratio

When preferences are large relative to plausible exits, common is out-of-the-money for a wide region of outcomes, and “valuation” becomes a weak predictor of founder cash [10].

3.9 Anti-dilution: dilution that arrives later

Broad-based weighted-average anti-dilution adjusts conversion terms in a down round so earlier preferred converts into more shares; full ratchet is even more punitive [6]. Either way, dilution is transferred disproportionately to common, typically in the same states of the world where exits are already likely to be disappointing.

Part 4: US vs Continental EU: Same Economics, Different Wrappers (and Different Failure Modes)

The mechanics that determine founder outcomes are universal: dilution is set by the fully diluted denominator, and cash is set by the liquidation waterfall. What changes between the US and continental Europe is not the math; it is the wrapper: the legal instruments used to postpone or crystallize valuation, the way employee equity is implemented, and the accounting/tax constraints that quietly reshape “price of equity.”

This section treats the US and continental EU as two ecosystems with distinct defaults. It shows how each ecosystem creates its own characteristic confusion between valuation and equity pricing, and why multi-round structures can produce the outcome that matters most in biotech: a company can raise at impressive headline valuations and still leave founders with little (or nothing) at a non-blockbuster exit.

4.1 The US stack: standardization, SAFEs, and the illusion of “simple” early equity

4.1.1 Pre-seed in the US: the SAFE postpones valuation but does not postpone dilution

The US innovation is transactional speed. The Y Combinator SAFE (Simple Agreement for Future Equity) is a standardized instrument designed to fund a company today and convert into equity at a future priced round based on conversion mechanics like valuation caps and discounts [11].

Two points drive most founder misunderstanding.

First, a SAFE is often described as “not a valuation,” but it embeds an effective valuation through the cap. If the cap is low relative to the next round’s pre-money, the SAFE converts at a lower price than the new investors, takes more shares, and creates more dilution than founders intuitively expect.

Second, “post-money SAFE” language exists because earlier SAFE forms often produced dilution surprises; post-money SAFEs were introduced to clarify ownership outcomes implied by a SAFE financing [11].

The core reality is: a SAFE does not eliminate pricing; it shifts pricing into a future conversion rule.

4.1.2 Valuation cap and discount are pricing mechanics

The valuation cap is a mechanism that determines the conversion price of the SAFE/note at the next priced round, and therefore determines how many shares early investors receive upon conversion [12][13]. A discount similarly sets a conversion price relative to the priced-round share price, and a SAFE typically converts at the more investor-favorable of (cap-based price) and (discount-based price), depending on the SAFE form and deal definitions [11][13].

4.1.3 Priced rounds in the US: preferred stock + explicit term economics

Once the US market enters a priced seed or Series A, it typically uses preferred stock with well-understood economic terms spelled out in standardized documentation [6]. The same logic from Part 3 applies: the cap table is not the cash register.

4.1.4 Employee equity in the US: 409A valuations and the preferred/common wedge

Employees often receive option strike prices far below the preferred round price because preferred is not common. Section 409A provides statutory context for why companies seek defensible fair market value determinations for equity compensation [14]. Financing valuations reflect the price of preferred shares with additional rights; 409A valuations focus on fair market value of common, which is typically lower due to allocation across the capital stack [15].

On the accounting side, SEC SAB 107 provides guidance on share-based payment valuation concepts, including fair value considerations often relevant to “cheap stock” analyses [16].

4.1.5 A US-style multi-round extension: how a pre-seed SAFE can erase the thin residual

Early capital raised quickly via SAFEs can accumulate into a preference overhang by the time multiple priced rounds occur. A €2M SAFE that converts into preferred can, in simplified 1× logic, raise the common break-even exit by roughly €2M once it becomes part of the preference stack [11]. That shift can erase a thin €1M residual in a mid-range exit.

4.2 Continental EU: more local diversity, more convertibles/warrants, and employee equity that often behaves like a claim

4.2.1 Deal architecture: fewer universal “model docs,” more local structuring

Continental Europe has fewer universally adopted venture templates across all countries, and investment agreements tend to be jurisdiction-specific. Invest Europe’s professional standards describe the typical investment agreement package (shareholders’ agreements, governance terms, exit provisions) while emphasizing local legal tailoring [17].

The practical result is that similar economics can be expressed through different legal wrappers, and early dilution can remain ambiguous until a priced round forces a single price-per-share framework.

4.2.2 Pre-seed in France: BSA AIR as a SAFE-like instrument

A French SAFE-like mechanism is the BSA AIR (Bon de Souscription d’Actions par Accord d’Investissement Rapide), commonly described as a standard investment agreement inspired by the SAFE that gives investors a right to subscribe to future shares upon triggering events, typically using cap/discount-like mechanisms [18].

The economic point is identical to a SAFE: valuation is postponed, but pricing is not eliminated; pricing is embedded in conversion rules.

4.2.3 Employee equity in continental Europe: three common patterns (France, Germany, Spain)

France uses distinctive instruments such as BSPCE (Business Creator Share Subscription Warrants), a mechanism enabling eligible companies to grant employees the right to purchase shares at a predetermined price under a regime designed to support startup employee ownership [19].

Germany often uses virtual structures. Virtual Stock Option Plans (VSOPs) are commonly described as phantom/virtual equity where employees do not hold actual shares or voting rights but receive an exit-linked cash payout subject to vesting and leaver rules [20]. German legal commentary commonly frames VSOPs as pragmatic but contractually nuanced structures [21].

Spain’s startup law reforms emphasize improved treatment for employee stock options, including an increased tax exemption threshold (commonly described as moving from €12,000 to €50,000) alongside broader incentives for startups, employees, and investors [22].

These patterns can create a specific continental-European failure mode: a cap table can look “less diluted” on paper because fewer real shares are issued to employees, while exit payouts are meaningfully reduced because a large virtual plan pays out in cash at the liquidity event.

4.2.4 Accounting under IFRS: equity-settled vs cash-settled plans matter

Many continental European companies operate under IFRS or IFRS-aligned expectations. IFRS 2 is the standard-setting anchor for share-based payment accounting and is explicit about fair value measurement and classification considerations [23].

This accounting lens reinforces the economic lens: if a plan is cash-settled, it behaves like a liability; if it is equity-settled, it behaves like equity dilution. The classification is not merely accounting: it reflects real economic behavior at exit.

4.3 The synthesis: the jurisdiction changes, the founder-risk equation does not

Across both ecosystems, the founder-risk equation has the same structure.

• The fully diluted denominator determines ownership, and it can move via option pools, convertibles, and employee plan design.
• The preference stack determines whether common is in-the-money at exit, and it grows with each financed round.
• Participation terms can transfer upside away from common even when exits are “successful” by headline standards.
• Cash-settled employee plans can behave like additional exit-linked claims that reduce shareholder proceeds.

This is why multi-million valuations and multi-million exits can still mean little (or nothing) for founders in biotech: the exit corridor for many assets is not always far above the accumulated senior claims created by multi-round financing [10]. The wrappers differ between the US and continental Europe. The payoff math does not.

Conclusion: The Cap Table Is Not the Cash Register

The four parts of this manual come down to one structural truth: ownership percentage and exit proceeds are not the same variable. Valuation sets the story. The term sheet sets the math. The waterfall sets the cash.

In biotech, where timelines are long, capital needs are heavy, and exit outcomes cluster below the preference stack, this gap is where founders get hurt. We have seen teams celebrate headline valuations, only to walk away from acquisitions with little. The math was always there. They just never ran it.

Understanding the mechanics is the first step. Acting on them is the second.

Questions to Ask Before Signing

Founders cannot negotiate what they do not understand. Before any term sheet is signed, these questions should have clear answers:

• What is the fully diluted share count used for pricing? Specifically: does it include the new option pool? Outstanding convertibles? Warrants?
• What is my effective pre-money? Compute (price per share × your shares) and compare it to the headline pre-money. The gap is the pool shuffle.
• What is the preference stack after this round? Add up all liquidation preferences. That number is your common break-even exit.
• Is preferred participating or non-participating? If participating, is there a cap? Participation transfers upside from common to preferred at every exit above the stack.
• What is the preference overhang ratio? Divide the preference stack by your realistic exit corridor. If the ratio is high, common is out-of-the-money for most plausible outcomes.
• What happens in a down round? Understand whether anti-dilution is broad-based weighted-average or full ratchet, and model the share count shift under a 50% down scenario.

These are the economics your investors already know. Understanding them puts founders on the same side of the table.

Sources