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Company Capitalization Scenario

Company Capitalization Scenario. Raising Capital and Ownership Value. 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. Round #1 Financing.

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Company Capitalization Scenario

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  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 F&F. • You negotiate with F&F and give them 10% ownership (equity). • Ten percent of the shares of the company’s stock. • Company has imputed value of $1 million. • F&F own 10% of company, invest $100,000. • Founders own 90% -- no cash investment (Sweat Equity).

  5. Round #2 Financing(A Round) • Seek venture capital fromventure capital (VC) firms. • Must decide how much $ needed. • With interested VCs, founders must negotiate the company valuation and percent of VC ownership. • Pre-money Valuation—Company Value Before VC Investment—Assume $2 million. • Assume successful in raising $2 million at $2m pre-money valuation. • Post-money Valuation: $4 million • New VC investor: VC owns 50% of company.

  6. Post Round #2Ownership • New ownership valuation: Cap Table. • VC owns 50% of company -- $2m of $4m– company valuation. Value of original owners = $2m. • F&F now own 5% (diluted from 10%) -- 5% x $4m. Value of F&F ownership: $200,000. • Founders now own 45% (remaining after VC’s 50% and F&F’s 5%). Value of founders’ ownership = $1.8m.

  7. Round #3 Financing(B Round) • Company now 2-3 years in business. • Revenue growing; profits foreseeable. • Seek larger VC or strategic investor. • Successful in raising $4m at pre-money valuation of $10m. • Company valuation now $14m after B Round, but still no liquid market for private company shares. • New investor is a large VC firm (LVC)

  8. Post Round #3 Ownership • LVC now owns 28.6% ($4m/$14m=28.57%). Value of LVC’s ownership = $4m. • Original VC owns 35.7% -- 50% of the remaining 71.43%. Value of VC’s ownership = $5m. • F&F own 3.57% -- 5% of remaining 71.43%. Value of ownership = $.5m ($500,000) • Founders own 32.14% -- 45% of remaining 71.43%. Value of founder’s 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 premium price, driven by Wall Street bankers and brokers, and shareholders would 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 (25/125=20%).

  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 • F&F: 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 • F&F: Invested $100,00. Current value = $3.57m (3470% ROI) • $3,570,000-100,000=$3,470,000/100,000=34.7 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 Google’s IPO stock price was $85. It now at about $565 after a 2 for 1 stock split in April, 2014, or an ROI of what?

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