bussiness valuation and equity meaning


I watch a lot of Shark Tank and Dragon's Den and I was wondering what are the consequence to give away lower equity than expected?
For instance, let's say my company value is 200k and I'm offering 20k for 10% equity. What are the immediate and future consequences of accepting a deal for 20k for 50% equity?
Thank you in advance for your enlightement.

Business Valuation

asked Dec 6 '13 at 12:34
Julian Livin' In China
1 point
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  • You earn less. Isn't it obvious? – Littleadv 6 years ago
  • Indeed, but I don't know what are the consequences to decrease the equity valuation of a company in the future. For instance, I sell 50% for 20k today, so 1% = 0.4k. If tomorrow the valuation of the company is 200k, 1% now = 4k. Obviously if I want to buy my equity back it's changed. This is one example of what could be the consequences. I would like to know more examples and not only "isn't it obvious" answer. Thanks. – Julian Livin' In China 6 years ago
  • What you describe is quite obvious and is a trivial math exercise. I'm not sure I understand what it is you're looking for in an answer... – Littleadv 6 years ago
  • I'm looking for example of consequences. But I should find my answers if I dig more into the subject. It's a very vast question and it's difficult to get into details. Thaks anyway for your interest. – Julian Livin' In China 6 years ago

1 Answer


The comments are already making this clear, but as an overly simplified answer:

Immediately you sign the deal for 20k at 50% the following two things happen:

Your business valuation has dropped from 200k to 40k and you now only own 50% of the equity.

For the knock on effects: Let's assume you burn that 20k pretty rapidly, you're going to want to raise more funds, and that's going to be hard to do, because, a) your company has a low valuation, and/or b) there's not much equity left to give away.

Let's say you're prepared to give up another 25%. You won't be able to offer a follow on round to your existing investor under the same, or slightly improved terms. They're unlikely to want to completely dilute/divest themselves to start again.

You might be able to argue that this 25% is worth another 20k to a new investor. You're unlikely to be able to convince anyone to spend 200k - because of the deal you already did. So, now you're going to need a lot of dilution on the first investor, as a minimum. More likely is that your new investors will want to see the previous investor bought out, or diluted and re-investing.

And even if you manage to pull all of this off, you'll now own 25% of your company, which still isn't worth anything substantial - with no decision making power, and you're likely working for nothing, with nothing coming in the future.

answered Dec 6 '13 at 19:34
Nick Stevens
4,436 points
  • That's what I'm talking about! Great Nick, thanks a lot for your clear answer. – Julian Livin' In China 6 years ago

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