When you want to prepare an investment proposal you need to know the value or your business. You can use one of four valuation methods, but we will be using the Discounted cash flow method.
The present value of a business is basically determined by three aspects:
We discount future value according to the following principle:
The answer is ... because when you offer me 70 dollars for my debt certificate, the discount rate you offer me is 30%. The next year the discount rate is still 30%, but the debt certificate is only worth 70 dollars, so its is discounted by 30% of 70 dollars = 21 dollars. I.e. answer b is correct.
Investors see you as a person who needs the money because you just lost your job. Discount rates for start-ups vary from 30% to 80% depending on the strength of the business model and the experience of the entrepreneurs.
In the spreadsheet below you can enter your nett cash flows and the discount rate to calculate the present value of your business and the internal rate of return (ROI). The following should be taken into account:
When your present value is 500.000 dollar and an investor has invested 200.000 dollar they would be entitled to 40% of the shares in that company
When you need to raise finance for your company, you don't want to give away most of your equity in the first round of finance. Usually investors provide the majority of the investment capital in the form of subordinated loans. These loans are subordinated because no collateral or guarantees are provided. When the cash flow allows, the loans can be repaid so the investor is less exposed. The share capital remains in the company until the shares are bought back by the entrepreneur(s) or the shares are sold to a third party.
When the company is very successful, the shares might increase in value twenty times over. This poses a serious problem for the entrepreneur(s). They don't have the money to pay for the shares so they need to sell their company to buy out the investors.
Investors prefer the Royalty Based Finance (or Revenue Based Finance) for cross border investments. The benefits are that investors share the risks of the investment wit the entrepreneur(s) and the entrepreneur(s) can buy back their shares for a fixed price.
The RBF package consists of three financial element with which can be played until a mutual beneficial financial package is constructed. The elements are:
Details of the investment proposal can be entered in the spreadsheet below:
5: Execute >