In financing rounds, your exact purchase price listed in the Stock Purchase Agreement (SPA) often does not match your investment amount. Why? Because most company’s Certificates of Incorporation (i.e., charter) do not allow the company to issue fractional shares. As a result, companies round up or down to the nearest dollar so that you fully pay for each share.
For example, suppose a company is selling shares of preferred stock at a price per share of $1.50. If you invest $1,000,000 into the company, you would be purchasing 666,666.67 shares. Because companies do not issue fractional shares, they will either round down the number of shares you are purchasing to 666,666 shares or round up to 666,667 shares. If they round down to 666,666 shares, your purchase price will be $999,999. If they round up to 666,667 shares then your purchase price will be $1,000,000.50. In either scenario, your purchase price will not be exactly $1,000,000.
Founders want as few shares as possible included in the fully-diluted capitalization. As a result, they will push for any option pool increase to not be included in the capitalization used to calculate the price per share. This leads to a higher price per share and thus, a higher valuation for the company.
Investors want as many shares as possible included in the fully-diluted capitalization. As a result, they will push for any option pool increase to be counted in the capitalization used to calculate the price per share. This ensures they are not being diluted by these convertible instruments or the option pool increases. This leads to a lower price per share and thus, more shares that the investors can purchase.