Valuation of your Firm by VC or Third Parties

Now you have an investor, whether a sophisticated one or not, interested in buying part of your new company.  In one instance, your investor has decided to value what your firm is worth at a lesser value than you had estimated.  In another, you have decided to allocate a percentage of the company when the investor has the same valuation of the company.  The calculations are different.

The first scenario is simple: the new valuation is determined by a relationship calculated between your original valuation with the proffered one.  The key is this, the greater the difference between the pre vs. post money valuation, the greater the loss of equity to the pre-money shareholders:

(1) Pre-money Valuation = Post-money valuation – Venture Capital Investment
(2) Post-money Valuation = Venture Capital Investment/Venture Capital Ownership Percentage
However it makes more sense to put together a spreadsheet that includes new investors but also allocates shares as options for new employees to see the impact on share ownership with the new investment.
Let’s define the variables: A= Founders Equity in Stock, B= Options Available in Stock, C= Options Granted, D= Investors Equity received in return for investment – a calculated value, E= Pre-money valuation – a constant, F= Money being invested – a constant.
Pre money Price per stock = E / (A+B)
Post Money Valuation = E + F
Stock to be issued to Investor = F/ (E/(A+B)) or (Pre-money Price per Stock)
So the total equity sums up = A +B + Stock to be issued to the Investor.
The second scenario needs to determine the equity to an investor wanting a percent of the company. This calculation requires high school algebra.  Investor looks to have 20% of Company Y for X dollar amounts.  We know the current outstanding shares. What is the new total number of shares for the company, assuming no difference in pre-and post-money valuations?
A+B = a constant – total of founders and options. For the purposes of solving the problem, I assume A+B = 750.  Y is the new total number of shares.
A + B + X = Y
.20*Y = X
By solving for both X and Y,
the answer is 187.5 shares

About Juan Ramón Zarco, SVVGP 胡安•雷蒙•扎尔科

Juan Ramon Zarco, 胡安•雷蒙•扎尔科, Silicon Valley Ventures Growth Partners llp, Hygieia Healthcare Technologies Company, AllRest Technologies LLC, Crimson Growth Partners LLP,, is an experienced as CxO, General Counsel and Secretary to public and private companies with global operations. Established track record of producing practical, revenue-focused solutions. As Counselor and Secretary, demonstrating vision, integrity, and sound business judgment, to CxOs. Managed complex, strategic transactions, M&A, contracts support, PE Financing, IPO, SEC compliance, Corporate/HR governance, IP licensing, Budgeting, Staff, outside counsel management, International market access strategies, Domestic & foreign government relations and advocacy. Creative in designing and implementing market access strategies. Practices law beyond conventional model with low-overhead and project-based fees. Effective at managing departments, formulating marketing strategies, balancing budgets, and implementing cost-saving measures. Extensive in-house and private practice experience, advising clients on commercial, corporate, international business, and technology law and policy.; For Sprint, he managed iDen international development in Southeast Asia, Middle East, and Africa, and contractual issues with Verizon. In Private Equity, he worked with Pegasus in vetting international investment deals and interim President for portfolio companies, such as Data Foundation, a data storage company, handling marketing, strategy, fund raising, and accounting. Before Pegasus, Mr. Zarco, as CLO and V.P. of Corporate Development, played a principal role in the structuring, international expansions for 2 telecom companies, U.S. Cable Group and Viatel, Inc. in financing and M&A deals exceeding $200 million. Mr. Zarco earned a J.D. from NYU Law School, M.B.A. from Cornell, and B.A. from Williams College; is fluent in Spanish, Portuguese, French, and German, with working knowledge of Russian, Arabic and Japanese.
This entry was posted in Capital and Management, Entrepreneurship, Valuation. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s