Venture Capital Equity


1

How much equity should VC get for $400K in startup funds? And what's the best way to figure this out if I adjust my capital requirements?

Equity Venture Capital Entrepreneurs

asked Aug 19 '11 at 06:09
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John
6 points
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  • this question is impossible to answer. You gave us no details. This is a decision that the investors and founders must make. Not us. – Tim J 9 years ago

1 Answer


2

This probably isn't the answer you wanted to hear, but it's true. It's impossible for us to tell you how much of your equity $400k is worth.

You need to value your company.

This is an investment banking task, so you'll find plenty of information and tutorials online geared towards wannabe finance kiddies doing interviews. The first approach you could take is a comparables analysis, in which you examine the prices at which similar companies to yours were bought (in terms of market position, finances, future growth potential and risk). This will help guide you as you do a more thorough analysis, called a "discounted cashflow analysis." This basically amounts to valuing your company as though it were a bond. To determine the cashflows on this bond, you need to make projections about your future growth; you will also need to determine a base value for the company, which you will read plenty about online.

Furthermore, you will need to determine the discount rate that is fair for your company. This "discount rate" is the value of $1 promised by your company 1 year in the future. Subtracting out the risk free rate (swap rates or Treasury security yields) gives you your "spread," which can be converted to an annual probability of default (they are equivalent, look it up). So you should choose a spread that gives a default probability you think is reasonable.

Once you've done all this you can discount the future cashflows from the company (like a bond) and price the company. You should expect to see a number similar to what you found while doing your comparables analysis, except now you have analysis to back it up to the investor.

As you can see, much of this is subjective, and you will have to have an idea of what the $400k is worth to you before you even start.

answered Aug 19 '11 at 08:33
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Jason
279 points
  • Great answer! Makes sense. My background is in Computer Science: do I need a business type to do this *correctly* or can I pick it up rather quickly? – John 9 years ago

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Equity Venture Capital Entrepreneurs