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# BEN Funding in tough times - T Williams

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BEN Event: 9th Feb 2010 - Business Funding in tough times

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• Cart before the horse
• ### BEN Funding in tough times - T Williams

1. 1. How to agree a business valuation<br />…that is acceptable to <br />both investor and investee…<br />
2. 2. Challenges are significant<br />Valuation is key to pricing<br />The pre-money valuation<br />…Yields the post MV<br />Thus a Pre MV of £3m with a £1m investment<br />…Equals a post MV of £4m<br />…With the investors owning ?<br />25% of the company = £1m ÷ £4m<br />
3. 3. THE ISSUE IS HOW TO ARRIVE AT THE £3M <br />PRE MONEY VALUATION?<br />
4. 4. Methods include…<br />Venture capital method<br />Discounted Cash Flow<br />Option Method<br />However…<br />I will illustrate and highlight a piece of the equation that is left out of conventional valuation discussions but is an absolute reality…<br />
5. 5. Take a typical negotiation of round 1 financing<br />Start at the issue of ‘valuation’<br />Investee lays a number on the table<br />Based on art as much as science <br />A different number comes from the VC<br />Price settles somewhere in the middle<br />Final result is usually closer to …<br />And then… the negotiations start<br />
6. 6.
7. 7. The investee and investor CANNOT understand the valuation until they fully understand deal terms<br />Thus the Term sheet might state a pre MV of £3m and from the investee’s perspective =  but £3m only stacks up if the new investors are getting ordinary shares (rank pari-passu)<br />…AND that is hardly ever the case<br />
8. 8. Lets assume the new investment share is a cumulative preference share<br />New investor gets their money back + accrued dividends before you get anything<br />If the dividend is 10% a year, = 10% x 25% or a further dilution of 2.5% a year<br />Also assume that there is a 50:50 chance that the company may be sold for less than post MV, say £2m not £4m<br />
9. 9. Savage deal terms? …<br />What is remarkable is the lack of quantification work on the impact of deal terms on notional values<br />Agreed negotiations on pre MV does not determine the investee / investor outcome<br />But if the company is sold for £500m does it matter? If it is £5m does it matter more?<br />
10. 10. Pre MV has no definitive significance<br />But as valuation determines the parties relative %’s it is a critical number<br />So, understand the material ‘what if’ scenarios and have all the material information at your fingertips when you start negotiating<br />