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Follow-On Reserve Strategy Analysis for VCs
Send the positions, the rounds you expect and the reserve balance, and get the price of every ownership point next to the cost of skipping it.
Follow-on reserve strategy content converges on ratios. Reserve half the fund. Reserve two times your initial check. Reserve by stage, or by conviction tier, or by a matrix of the two. Every one of those is a rule for setting the reserve before you know what the portfolio will ask for, and none of them helps on the morning the portfolio asks for more than you have. The decision that actually gets made is which companies you stop supporting, and it gets made by default rather than deliberately.
Cairnwell Fund II is an invented example. A 120.0m fund with 86.0m deployed into five initial positions, 22.0m of fees and expenses across the fund life, and 12.0m of uncalled reserve left. All five companies expect to raise within four quarters. Holding full pro rata in every one of those rounds costs 18.335m. The reserve covers 65.45 percent of it. The shortfall is 6.335m before anybody has considered the second round any of these companies will need.
So the reserve is already oversubscribed, and the interesting question is what a point of ownership costs in each company. Harrowgate is raising 20.0m on an 80.0m pre-money, a 100.0m post. Holding 12.00 percent there costs 2.400m and preserves 2.40 points, so a point costs 1.000m. Ockbrook is raising 45.0m on a 255.0m pre, a 300.0m post. Holding 7.50 percent costs 3.375m and preserves 1.125 points, so a point costs 3.000m, three times as much.
A point of ownership costs one percent of the post-money, and nothing else
That result is not a coincidence in the example, it is the identity. A pro rata check buys shares at the round price, so the points it preserves are always the check divided by the post-money valuation. Points per million is 100 divided by the post-money, every time. Which means the earliest round is the cheapest ownership you will ever buy in that company, and every quarter you defer, the same point costs more. That is the whole of the reserve arithmetic, and it is almost never written down.
It also produces a result that reads as a paradox. Harrowgate at 12.00 percent, a 20.0m round on an 80.0m pre now and a 40.0m round on a 200.0m pre later. Hold the first and skip the second and you spend 2.400m and finish at 10.00 percent. Skip the first and hold the second and you spend 3.840m and finish at 9.60 percent. The cheaper path ends with more ownership, because skipping a round shrinks the pro rata right you carry into the next one.
Two things the arithmetic will not do for you. Your pro rata right is contractual and may not exist: Delaware is explicit that no stockholder shall have any preemptive right to subscribe to an additional issue of stock unless expressly granted in the certificate of incorporation. And a reserve scenario is a projection. The SEC treats targeted or projected performance returns-1) as hypothetical performance in an advertisement, which is a reason to keep these scenarios internal.
How it works
Send the positions
Current ownership and invested capital per company, plus the reserve balance and remaining fund life.
Price a point
Cost per ownership point in each company, from the post-money of the round being raised.
Model not following
The ownership you hold after each round you skip, and after the rounds that follow it.
State the shortfall
Total demand against the reserve, with the gap named rather than allocated away quietly.
What you get
- The cost of one ownership point in every company, derived from the post-money rather than asserted
- Total pro rata demand across the expected rounds, against the reserve you actually have left
- The ownership you land on in each company if you do not follow, computed round by round
- Multi-round paths priced side by side, including the ones where deferring costs more ownership
- The pro rata right traced to the agreement that grants it, or flagged as unverified
- A reserve position written for the partnership to decide from, with the trade-offs stated and nothing ranked
Common questions
Does this tell me which companies to follow into?
No, and it is built not to. It prices a point of ownership in each company and prices not buying it, then hands both to the partnership. Ranking those requires a view on each company's outcome, which is the judgment the partners are paid for. A tool that ranked them would be substituting an assumption for that judgment.
Why is the cost per point always one percent of the post-money?
Because a pro rata check buys at the round price. Your check divided by the post-money is the fraction of the company it represents, whatever your existing ownership is. On the worked example a point of Harrowgate costs 1.000m at a 100.0m post and a point of Ockbrook costs 3.000m at a 300.0m post.
How can skipping the earlier round leave me with less ownership for more money?
Your pro rata right in the next round is a percentage of your ownership going into it. Skip a round and that base is already diluted, so the right you exercise later is smaller and priced higher. Harrowgate finishes at 10.00 percent for 2.400m on one path and 9.60 percent for 3.840m on the other.
What if we do not actually have a pro rata right?
Then the analysis has to say so, because the whole model assumes you can buy at the round price. Preemptive rights do not exist in Delaware unless the charter grants them, and a contractual right in a side letter can lapse or be waived at a later round. Set the rights field honestly and it gets flagged rather than assumed.
Where does the underlying portfolio data come from?
The reporting you already collect. The portfolio monitoring pack holds the positions, the runway and the raise timing this analysis reads, and founder update analysis is what turns a monthly email into the fields it needs. Stale ownership is the most common source of a wrong answer here.
Can I show these scenarios to LPs?
Take advice first. Projected returns are hypothetical performance under the SEC marketing rule, and an adviser may only include them in an advertisement subject to specific conditions. Realized results are a different matter, and fund performance and benchmark analysis works from actual cash flows rather than projections.
How does this connect to the rest of the portfolio work?
It sits between monitoring and the partnership meeting. The reserve position is a standing agenda item, so the board meeting preparation pack is often where it lands, and realization and attribution review is the retrospective on exits. Portfolio construction review measures where the reserves have already moved the fund.
Follow-On Reserve Strategy Analysis for VCs
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