Join Rudolph Rosenberg for an in-depth discussion in this video What is valuation?, part of Entrepreneurship: Raising Startup Capital.
- In this course and when you are raising capital in general, you'll be talking non-stop about the value of your company. This is a critical element of raising capital, and especially when you are raising capital with equity. When doing so, you are, in short, selling shares of your company in exchange for the capital you need. By doing so, you therefore are left with less shares and are not anymore the only owner of the company. For example, you could be raising one million dollars for 35 percent of your shares.
That would mean that after you've successfully raised those one million dollars, you will be owning 100 percent minus 35 percent of the company, or in other words, will be left with 65 percent of your company, and your investor will own 35 percent of the company. The big question then is how many shares will you be giving for the money you want? And that question is answered with the valuation of your company. Once you and the investor agree on the value of your company, then you know the value of 100 percent of your shares.
If you divide it by 100, then you know the value of one percent. If, for example, you agree that your company is worth one million dollars, then if you divide it by 100, then you know that one percent of your company is worth 10,000 dollars. In that case, if you need to raise 100,000 dollars, then all you need to do is give away as many percentages as needed until you get to that amount.
In this particular example, you need to give 10 percent. So the more your company is worth and the more shares you keep, and the process of estimating the value of your company is called the valuation of your company. So everyone is interested in the valuation of your company. And the entrepreneur, you, and the investor need to agree on the value. There is no one way to value a company. There are many ways, and everyone has a different opinion on the best way to do it.
So be ready to negotiate, exchange opinions, verify numbers, because that's going to take some time. As you might guess, it's in the best interest of the entrepreneur to have a high value for his company, and in the interest of the investor to value it low. At the end this needs to be a win-win, so it's important to debate and find a value for the company that seems realistic for both the entrepreneur and the investor.
- List three variables that will affect the source of capital you choose to fund your company.
- Identify the best strategy most entrepreneurs can use for finding capital and investors for their company.
- Name two elements an entrepreneur must consider when determining the amount of capital their business will need.
- Cite two details that should be included in a business plan to help investors become familiar with what they will be funding and the term of their investment.
- Explain what the JOBS Act did to facilitate crowdfunding for entrepreneurs.
- Summarize the typical characteristics of an angel investor.