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