Let\u2019s start with the basics. If you are a going business with a track record of revenues, then ![\"\"](\"https:\/\/berkonomics.com\/wp-content\/uploads\/2015\/04\/money1.jpg\")
the importance of accurate current financial statements cannot be overstated. If there is no record of revenues, see the \u201cThe Berkus Method\u201d available with any search query for valuing the business before revenues.<\/p>\n
And you should \u201cknow your numbers and be able to defend them\u201d during early meetings with candidate investors.\u00a0 At the least, historical numbers must include the latest income statement and balance sheet, showing activity through the latest period.\u00a0 If the business is not a startup, expect to supply income statements for the past several years as well, to emphasize trends in revenue and costs.<\/p>\n
Projections for your future<\/strong><\/p>\n You should expect to present detailed projections for the next 12 months as a basic minimum.\u00a0 Beyond that, plan to prepare projections for two additional years, but not necessarily in account-by-account detailed format.\u00a0 Sophisticated businesses will also create a cash flow projection for the same period, showing cash used and remaining at the end of each period. \u00a0And note that projections showing \u201cunbelievable\u201d rapid growth are always suspect. Careful about \u201chockey stick\u201d forecasts.<\/p>\n How much money can you get? \u00a0<\/strong><\/p>\n Well, here is a question with a circular answer.\u00a0\u00a0 To grow your business to a size that will be attractive to a VC or angel making an investment now, you\u2019ve got to show that the business will be large enough at the time of the investor\u2019s liquidity event (cashing out) to make the investment attractive at all.<\/p>\n [Email readers, continue here…]<\/em><\/span> Most VC\u2019s look for a 10x opportunity \u2013 that is \u2013 a ten times increase in the valuation from So, you\u2019ve got to play with the numbers to determine your level of comfort. The more you ask for \u2013 the more equity you give up.\u00a0 Completing this exercise often leads you to lower your expectations about the amount of money to be raised.<\/p>\n It is also a factor that early stage investors don\u2019t want a controlling interest in your company. \u00a0It is a disincentive to you and a burden to them. \u00a0\u201cEngineer\u201d your needs if possible so that you give 20-35% to investors on the first professional investor round.<\/p>\n Here\u2019s a valuation example for you based on amount to be raised<\/strong><\/p>\n Try this example: \u00a0You want to raise $2,000,000 today.\u00a0 Your projections and the analysis we\u2019ll undertake below lead to a possible valuation of $40,000,000 in five years, assuming that you meet your plan, and allowing for a 50% discount to your projected numbers during the investor\u2019s evaluation.\u00a0 That means \u2013 using the investor\u2019s 10x expectation for return \u2013 making the business worth $2,000,000 today at best.\u00a0 To raise $2,000,000, you must give up 50% of the post-investment equity (the current value of $2,000,000 plus the investment of $2,000,000).\u00a0 The post-investment value would be $4,000,000.\u00a0 When multiplied by 10x, the target valuation at exit would be the $40,000,000 quoted above.\u00a0 It is a fact that very few businesses reach the $40,000,000 valuation hurdle. And it is probable that you\u2019ll need more money to reach that target, muddying the calculation and reducing your equity percentage.<\/p>\n Remember your employee option allocation<\/strong><\/p>\n Given your strong desire to keep controlling interest in the early stages of growth, the amount that can be raised must be lower than $2,000,000 in order to accomplish this goal.<\/p>\n So, the circular reasoning exercise returns.\u00a0 Raise your projections (and sell your investor on the increased projections as a result) or lower the amount of capital you raise in this round.\u00a0 Your future rounds should be at higher valuations if you meet your plan, making dilution of your equity less onerous at that time.<\/p>\n","protected":false},"excerpt":{"rendered":" If you\u2019re looking for growth capital, this one\u2019s for you. We\u2019ll cover what information you\u2019ll expect to provide, your range of expected values and amounts of investment to expect. \u00a0All to help you set your expectations. \u00a0OK? Financial History and … Continue reading ![\"\"](\"https:\/\/berkonomics.com\/wp-content\/uploads\/2019\/03\/Company-growth-300x180.jpeg\")
investment to liquidity event.\u00a0 Later stage investors sometimes look for less, since the business has already proven its capability to stay in the game and has already completed its product development cycle, eliminating more risk for the investor.<\/p>\n![\"\"](\"https:\/\/berkonomics.com\/wp-content\/uploads\/2017\/09\/dividing_equity-300x225.jpg\")
Your potential investor will include the full number of shares reserved for your present or future option plan \u2013 usually 15-20% of total equity \u2013 making your personal equity 20% less when calculated as \u201cfully diluted,\u201d or including a reserve for options.\u00a0 Therefore, in the example above, you would control less than 50% of the company at funding if you received $2,000,000.<\/p>\n