Company%20Capitalization%20Scenario

1
Company Capitalization Scenario

• Raising Capital and Ownership Value

2
The Founders

• Founders you and partners
• Have a concept for an exciting new business
• Have sketched a general business model
• Prospects for success appear promising
• Need financing to pursue your dream

3
Round 1 Financing

• Start-up financing or seed capital needed
• To produce persuasive and professional business
  plan
• To do some research on market and competition
• For travel expenses to raise working capital
• Round 1 Friends and Family
• Objective Raise minimum 100,000 to cover
  expenses above.

4
Round 1 Financing - Friends Family

• You decide to seek 100,000 from FF.
• You negotiate with FF and give them 10
  ownership (equity).
• Ten percent of the shares of the companys stock.
• Company has imputed value of 1 million.
• FF own 10 of company, invest 100,000.
• Founders own 90 -- no cash investment (Sweat
  Equity).

5
Round 2 Financing(A Round)

• Seek venture capital from venture capital (VC)
  firms.
• Must decide how much money is needed.
• With interested VCs, founders must negotiate the
  company valuation and percent of VC ownership.
• Pre-money ValuationCompany Value Before VC
  Investment
• Assume 2 million.
• Assume you are successful in raising 2 million
  at 2m pre-money valuation.
• Post-money Valuation 4 million (2m pre-money
  valuation 2m put in by VC.
• The new VC investor owns 50 of company.

6
Post Round 2 Ownership

• New ownership valuation Capitalization Table
• Referred to as Cap Table
• VC owns 50 of company -- 2m of 4m company
  valuation. Value of original owners 2m.
• FF now own 5 (diluted from 10) -- 5 x 4m.
  Value of FF ownership 200,000.
• Founders now own 45 (remaining after VCs 50
  and FFs 5). Value of founders ownership
  1.8 million.

7
Round 3 Financing(B Round)

• Your company has been in business 2-3 years.
• Revenue is growing profits are foreseeable.
• Seek larger VC or a strategic investor to
  accelerate growth
• You are successful in raising 4m at a pre-money
  valuation of 10m.
• The new investor is a large VC firm (LVC)
• Company valuation now 14m after the B Round, but
  still no liquid market for private company
  shares.

8
Post Round 3 Ownership

• LVC now owns 28.6 (4m/14m28.57). Value of
  LVCs ownership 4m.
• Original VC owns 35.7, or 50 of the remaining
  71.43. Value of original VCs ownership 5m.
• FF own 3.57, or 5 of the remaining 71.43.
  Value of FF ownership .5m (500,000)
• Founders own 32.14, or 45 of remaining 71.43.
  Value of founders ownership 4.5m

9
Round 4 Ownership Liquidity

• Assume
• Company now 5 years in business
• Annual revenues 50m
• Operating income for that year 10m
• Shareholders want liquidity -- to be able to sell
  some of their shares for cash.

10
Three Liquidity Options

• Borrow money from bank (debt).
• Banks reluctant to loan for shareholder
  liquidity.
• Sell to strategic buyer (another company, such as
  Yahoo or Google).
• Strategic buyers often bargain tough on price and
  usually want control.
• Sell shares to public IPO
• Public usually pays a premium price, driven by
  Wall Street bankers and brokers, and all
  shareholders would now have liquidity -- a market
  in which to sell their shares.

11
IPO

• IPO Steps
• Valuation of company investment bankers
  participate
• Your company 50m revenues and 10m operating
  income.
• Media companies values today range from 1.5-2.5x
  revenues- and 8-12x operating income.
• Assume 2x revenues and 10x operating income
• 100 million valuation -- pre-money and pre-IPO
• Company raises 25M in shares sold to public for
  a 20 share in the company (25/12520).

12
Post-IPO Company Value Ownership

• Company now valued at 125 million
• 100m pre-IPO 25m post-IPO
• Ownership (Cap Table)
• Public 20 -- 25/125m 25m
• LVC 22.88 -- 80 x 28.6 28.6m
• VC 28.56 -- 80 x 35.7 35.7m
• FF 2.86 -- 80 x 3.57 3.57m
• Founders 25.7 -- 80 x 32.14 32.14m

13
Return on Investment IPO Day

• Valuation of each investor at close of IPO
  (Assuming price of all stock sold is the same as
  offered) and ROI
• Founders Invested 0 cash. Current value
  32.14m
• FF Invested 100,00. Current value 3.57m
  (3470 ROI)
• 3,570,000-100,0003,470,000/100,00034.7 or
  3470
• VC Invested 2m. Current value 35.7m (1685
  ROI)
• LVC Invested 4m. Current value 28.6m
  (612.5 ROI)
• Public Invested 25 m. Current value 25m (0
  ROI)
• Obviously, current investors are gambling that
  current growth pattern continues.
• In 2004 Googles IPO stock price was 85. It is
  now at about 565 after a 2-for-1 stock split in
  April, 2014, or an ROI of what?