ENTERPRISE APPRAISAL TO PERFORM RISKY INVESTMENT

Currently, the new trend of enterprises and investment funds is to invest in venture capital in individuals or groups with good ideas, specific goals and technology solutions. The lessons from venture capital investment from Softbank (Japan) and Yahoo when investing in businesses like Alibaba from the very beginning have shown many investors that this is a dangerous but also beneficial game. huge economic benefits if successful.

However, in the next round of fundraising for startups, how to value this potential business, how much should the funds contribute and how much is it worth the% of the shares in the business need specific analysis and assessment of the business.

The following is one of the methods of enterprise assessment for venture investment purposes that Indochina International Investment & Appraisal Joint Stock Company applies:

Lets analyze the economic benefits first. Economic benefits (not just price). Price discussions focus on pre-equity value - how much is the company worth before investments are made? You will hear this term "value before capitalization" in discussions between the entrepreneur and the venture capitalist.

Determining pre-equity value is an art, not a skill, and many frustrated entrepreneurs seem to follow an ambiguous process. Unlike what you learn in a finance class in business schools, where you calculate discounted cash flows and apply a weighted average cost of capital, the problem is not based on a formula. any magic. The valuation of business projects offered in an reciprocal negotiation is based on three factors:

(1) The amount of capital that entrepreneurs want to call for investment to make their first milestones;

(2) Investors target ownership (usually 20-30%);

(3) The degree of competition of the agreement (that is, if the businessman is pursued by many investors, then they can raise the price).

But pre-equity value isnt the only term for price: Post-equity value also plays an important role. Value after capital contribution is the pre-capital value plus the investment. That is, if a company can raise $ 4 million in equity when its pre-equity value is $ 6 million, then its post-equity value is $ 10 million. So venture capitalists have spent $ 4 million to own 40% of the company and management team (founders, employees, directors) owns the other 60%.

Another term that affects price is option size. Most venture capitalists investing in companies need to hire additional management members, sales and marketing personnel, and professional talent to build the business. Some startups start their lifecycle with a founding team eager to hire a good CEO from outside. These newly hired employees receive stock options, and issuing these will dilute the ownership of other shareholders.

In the process of estimating additional hiring needs, many venture capitalists will need a “pond of options” with unallocated stock options, thereby forming a budget of options to buy shares. for these new employees to avoid further dilution of ownership. A stock option pond usually comes with an allocation of management team (for example, an option pond is in pre-equity value), independent of the investors ownership. In the above example with $ 4 million invested in $ 6 million worth of pre-equity (or a “4: 6” share of ownership), if the investors are an unallocated 20% stock option pond, venture capitalists still own 40% of the shares and the remaining 60% is divided between an unallocated 20% stock option pond by decision. of the Board of Directors and 40% of the shares belong to the ownership of the management team. In other words, the current management team / founding members have given up 20% of their 60% ownership to the new staff.

Indochina International Investment & Appraisal Joint Stock Company (INA)

• Address: 121 Nguyen Van Troi, Ward 12, Phu Nhuan District, Ho Chi Minh City
• Hotline: 0934 252 707 / Email: info@inavn.vn