The value of your equity in this toll road will now have to reflect the interest payments on this debt. In the toll road example, assume that you can borrow $100 million from a bank at 7.5%, a rate that is much too high, given the risk of the investment (zero). It will be the value of the business, with the next best capital provider providing the $100 million in capital. In general, the value that you will use to compute your percentage ownership will be neither the pre-money, nor the post-money value. The reality will fall somewhere in the middle. Case 2 - Lots of entrepreneurs with valuable franchises, a monopolist capital provider : At the other extreme, if I (the VC) am the only game in town for capital, I will argue that without me your franchise is worth nothing, and that I should end up with all of the value (thus giving me close to 100% of the business).You (as the entrepreneur) have all the power in this negotiation and I will end up with a 50% share of the post-money valuation ($200 million). Case 1 - Only entrepreneur in market, Lots of capital providers: Assume that you are the only entrepreneur with a valuable franchise in the economy and there is a large supply of capital (from banks, venture capitalists, private equity investors).
The value of the business, after the capital infusion (and investment) is $200 million, and the capital I am providing is $100 million, entitling me to 50%, right? Not so fast! The actual answer will depend upon your bargaining power (as the entrepreneur) and mine (as the venture capitalist), and the easiest way to see this is in the limiting cases:
At first sight, the answer may seem obvious. The question at this point is what proportion of your business I should get as the venture capitalist. A late night family gathering is almost never a good teaching moment, especially when your own children are in the audience. While one family member suggested that the second offer was obviously better and everyone else in my family concurred, I was tempted to argue that it was not that obvious, but wisely chose to say nothing. In one episode, a contestant was faced with two offers: the first shark offered $25,000 for 20% of the business and the second one jumped in with $100,000 for 50% of the business.
#VALUATION WITH PRE AND POST TAX CASHFLOWS TV#
Like some large families, we make even TV watching a competitive sport, especially when there are multiple shark offers on the table, with family members ranking the offers from best to worst. For those of you who have never watched an episode, it involves entrepreneurs (current or wannabe) pitching business ideas to five 'sharks', who then compete (if interested) in offering capital (cash) for a share of the business. Having gone through all the Walking Dead episodes during the summer and Criminal Minds multiple times, they chose Shark Tank as the show to watch in marathon format. My kids are inclined to binge TV-watching, especially in the winter, and this Christmas break, when they were all home, they were at it again.
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