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Valuation, Financing, Cap Tables

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  1. Valuation, Financing, Cap Tables

  2. So Far… • Recognizing and assessing opportunity • Pocd • Business models • E’ship – A process view • Financing The Venture • Managing uncertainty

  3. If You Can Grow w/out External Financing… • You are much better off…no dilution, no outside investors to manage, no gun to your head on an “exit” • Requires: A business w/ low equity capital requirements • Highly capital efficient • Significant debt availability

  4. If You Do Raise Outside Equity… • The higher the “inherent rate of return” on equity… • The higher the proportion of equity the entrepreneur(s) will be able to hold on to

  5. Investors Generally Back Into A Valuation, Don’t Start There • What is my best guess about terminal value and exit time • What is my best guess about future funding requirements and resultant dilution • What is the most I can afford to pay now i.e., what is the smallest % ownership I can walk away w/ and still get my required return

  6. Valuation • Implied or Implicit or Imputed Valuation is Different than “Calculated (NPV) Valuation” • Have you ever bought a share of stock? • Did you calculate the NPV of the firm’s cash flows? • I can still do the math: $/% = Implicit Valuation

  7. Valuation (2) • We have generally done AFTER the fact as a way of calibrating progress, or lack thereof • Our simple model is admittedly flawed – doesn’t account for much but simple “common %” i.e., by dividing by % ownership we are ignoring any preference in return

  8. Pre And Post Money Valuations • The amount of money invested and the % bought determine a “Post Money” valuation e.g., the business is worth $__ after I put my money in • Example: If I buy 20% for $1 million the 100% must be worth $5 million • So, “before my money went in” it must have been worth $4 mil ($5 -$1)

  9. The Simple Math • Post-money – new money in = Pre-money • Pre-money + new money in = Post-money

  10. The More Complicated Math

  11. The MOST You Will Pay Is Not What You Hope To Pay • The resulting valuation is a function of negotiation influenced by • competition for the deal / entrepreneur’s alternatives • Investors’ appetites, experiences, specific knowledge

  12. Cap Tables • Show the ownership stakes over time • Across multiple “rounds” of financing • Allow computation of implied valuation of the company and implied valuation of each owner’s shares over time

  13. Goood decisions come fromhaving good alternatives from among which to choose The Lesson: