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How is Equity Calculated?
Let's walk through an example of how a member's equity is calculated throughout different events in the life cycle of a Vault.
Consider a case where Alice, Bob, and Charlie are forming a Vault. They each contribute 5 ETH in the initial funding round. The equity distribution is as follows:
- Alice: 5 ETH / 15 ETH --> 33.3%
- Bob: 5 ETH / 15 ETH --> 33.3%
- Charlie: 5 ETH / 15 ETH --> 33.3%
--> Total Vault value: 15 ETH
Since the contributions are equal, the equity percentage ownership is the same for each member.
Now that the Vault is funded, the squad started to operate. Consider a few common events that happen after the first funding round and how it affects equity distribution:
- They buy an NFT and spend all of the 15 ETH that was raised
- The NFT value then increases from 15 ETH to 30 ETH
- The squad decided to open an additional funding round to attract new members
- David joins in the new funding round and contributes 5 ETH, but Alice, Bob, and Charlie don't contribute to the new funding round
The equity distribution after the new funding round closes is then as follows:
- Alice: 33.3% * 30 ETH + 0 ETH = 10 ETH --> 28.57%
- Bob: 33.3% * 30 ETH + 0 ETH = 10 ETH --> 28.57%
- Charlie: 33.3% * 30 ETH + 0 ETH = 10 ETH --> 28.57%
- David: 0% * 30 ETH + 5 ETH = 5 ETH --> 14.29%
--> Total Vault value: 35 ETH
Note that in this calculation, the NFT value increase has been accounted for and accredited to the investors of the first funding round. David, who joined afterward, is joining at a different Vault Valuation. Therefore, despite having contributed the same amount of funds to the Vault (5 ETH), his equity percentage is lower than the stake of the earlier investors.
Consider a case where a member wants to leave the Vault, in this case, Alice. Members can only be removed from the Vault if their equity percentage is 0%, i.e., they have been paid out fully. As per the calculation in the example above, Alice is owed 10 ETH, as this is the value of her equity share.
The Vault has to generate liquidity to pay out a member's total equity share, which can be done through funding rounds or selling assets. The squad has to approve each member's payout through an Exit/Payout Member proposal.
After Alice's payout, the equity distribution is then as follows:
- Alice: 33.3% * 30 ETH + 0 ETH = 10 ETH; payout 10 ETH --> 0%
- Bob: 33.3% * 30 ETH + 0 ETH = 10 ETH --> 40%
- Charlie: 33.3% * 30 ETH + 0 ETH = 10 ETH --> 40%
- David: 0% * 30 ETH + 5 ETH = 5 ETH --> 20%
Note in this case that the equity percentage that Alice "gave back" to the Vault in return for her payout has been distributed to the remaining members according to their equity shares in the Vault.
Note that equity percentages of individual members are displayed with two decimal points in the app. Due to rounding errors, the sum of all members' equity percentages may not yield 100% at all times.