Description
This is a presentation describes the valuation methods for new ventures, importance of equity stake, valuation methods like implied valuation, bottom up valuation, per share valuation.
LOGO
Funding New Ventures: Valuation, Financing and Capitalization Tables
Contents
1 2 6 7
Valuation
Implied Valuation
Importance of Equity Stake
Bottom-up Valuation
3
4 5
Equity Stake
8
9 10
Per-share Valuation
Valuation Approach
Complications
Proportional Ownership Valuation
Capitalization Table
Valuation ?Any investor faces two questions
? How many shares to buy? ? At what price to buy them?
Importance of Equity Stake
Higher Equity Stake
Greater control of company
Higher proportion of profit
The question of dilution of stake is critical for Entrepreneurs because of the above factors
Equity Stake
Low Equity Capital
Not Capital intensive •Growth funded by strong cash flows
•
High proportion of Equity Stake
Low Equity Capital
Capital Intensive •Financed with Debt
•
Significant amount of Equity earning extraordinary return
Valuation Approach
1
Proportional ownership approach
2
Per – Share approach
Proportional Ownership Valuation ?Implied
? Done after the investment is made
?Bottom-up
? Calculating a future value using an internal rate of return
Implied Valuation ?It is generally called “Postmoney” valuation
? Mathematics of such valuation is given below:
For eg. if $1 million to buy 10% stake, then the post money valuation is Post-money = $1,000,000/10% = $10,000,000 General Formula:
Post-money = Pre-money + new money
Bottom-up Valuation
General Formula:
Future Value = (1+r)n * I
where
r = required IRR n = number of years in the holding period I = amount of investment
Per – Share Valuation Example to show the valuation
? 900,000 shares outstanding before the investment ? Investor wants to own 10% for $1 million ? He buys 100,000 shares at $10/share ? Newly established price makes the pre-money valuation $9,000,000 ? Post-money = $10,000,000 ($9,000,000 + $1,000,000)
Complications in Valuation
?Stock Options
? ESOPs create problems in valuation because it dilutes the stake of investor ? Company is generally asked to create the pool of options before the investment
?Investor Preference
? Presence of a preference life Preferred Stock ? It may allocate a higher proportion of value to the investor ? Makes difficult to determine the true value
Capitalization Table
Used to keep track of multiple investments data in an understandable way Example format for Capitalization table
Initial founding capitalization 1/1/2004
# of share s $ per share Total Inv. % owne rship
First round investment 1/1/2005
# of share s $ per share Total Inv. % owne rship
Second round investment 1/1/2006
# of share s $ per share Total Inv. % owne rship
Foun der Inv. 1
Inv. 2
Total
LOGO
doc_294553584.ppt
This is a presentation describes the valuation methods for new ventures, importance of equity stake, valuation methods like implied valuation, bottom up valuation, per share valuation.
LOGO
Funding New Ventures: Valuation, Financing and Capitalization Tables
Contents
1 2 6 7
Valuation
Implied Valuation
Importance of Equity Stake
Bottom-up Valuation
3
4 5
Equity Stake
8
9 10
Per-share Valuation
Valuation Approach
Complications
Proportional Ownership Valuation
Capitalization Table
Valuation ?Any investor faces two questions
? How many shares to buy? ? At what price to buy them?
Importance of Equity Stake
Higher Equity Stake
Greater control of company
Higher proportion of profit
The question of dilution of stake is critical for Entrepreneurs because of the above factors
Equity Stake
Low Equity Capital
Not Capital intensive •Growth funded by strong cash flows
•
High proportion of Equity Stake
Low Equity Capital
Capital Intensive •Financed with Debt
•
Significant amount of Equity earning extraordinary return
Valuation Approach
1
Proportional ownership approach
2
Per – Share approach
Proportional Ownership Valuation ?Implied
? Done after the investment is made
?Bottom-up
? Calculating a future value using an internal rate of return
Implied Valuation ?It is generally called “Postmoney” valuation
? Mathematics of such valuation is given below:
For eg. if $1 million to buy 10% stake, then the post money valuation is Post-money = $1,000,000/10% = $10,000,000 General Formula:
Post-money = Pre-money + new money
Bottom-up Valuation
General Formula:
Future Value = (1+r)n * I
where
r = required IRR n = number of years in the holding period I = amount of investment
Per – Share Valuation Example to show the valuation
? 900,000 shares outstanding before the investment ? Investor wants to own 10% for $1 million ? He buys 100,000 shares at $10/share ? Newly established price makes the pre-money valuation $9,000,000 ? Post-money = $10,000,000 ($9,000,000 + $1,000,000)
Complications in Valuation
?Stock Options
? ESOPs create problems in valuation because it dilutes the stake of investor ? Company is generally asked to create the pool of options before the investment
?Investor Preference
? Presence of a preference life Preferred Stock ? It may allocate a higher proportion of value to the investor ? Makes difficult to determine the true value
Capitalization Table
Used to keep track of multiple investments data in an understandable way Example format for Capitalization table
Initial founding capitalization 1/1/2004
# of share s $ per share Total Inv. % owne rship
First round investment 1/1/2005
# of share s $ per share Total Inv. % owne rship
Second round investment 1/1/2006
# of share s $ per share Total Inv. % owne rship
Foun der Inv. 1
Inv. 2
Total
LOGO
doc_294553584.ppt