# Thread: Need some help on equity and shares in a company.

1. ## Need some help on equity and shares in a company.

Hi everyone. I have some questions and would like to send a PVT message to whomever is knowledgeable about equity and shares in a company.

plus can I determine the value of a company by the input of a certain (%) of the company. Lets say one person has 10% share and finances R100 000. does that mean the company is valued at R1 000 000?

2. Originally Posted by Random Hero
Hi everyone. I have some questions and would like to send a PVT message to whomever is knowledgeable about equity and shares in a company.

plus can I determine the value of a company by the input of a certain (%) of the company. Lets say one person has 10% share and finances R100 000. does that mean the company is valued at R1 000 000?
This is a misconception perpetuated by shows like dragons den. i.e when the dragons dont like an idea they tend to say that the investment the person requires and the amount of equity they are willing to give away for that investment means that person has valuated their company as etc etc.

However
Equity= Assets Less Liabilities

However with investment as is the case with many venture capitalist, they invest on a future value of the company. i.e some kid comes with a code that can search the internet. The code has little present value, but with an investment the future value could be millions, and the investor will own 10% of the millions.

The dragons wrongly believe that investment means they are buying a percent of the company and the cost of the percentage can be used to calculate the value of the company.
Thus negating the whole meaning of the word investment.
Investment is time, energy, or matter spent in the hope of future benefits

3. https://en.wikipedia.org/wiki/Reggae_Reggae_Sauce
Case in point

Levi Roots asked the dragons for £50000.00 in exchange for 40% equity, which according to the dragons would of put value of his company at £125000.00(No where close to value). But because they liked his idea they did not venture to say he was over evaluating his company.

4. Vieome is quite right. The equity is never a measurement of a company's worth. The share capital, amongst other things, can be a pointer to the faith, or lack thereof, that the investors have in the enterprise.

Worth, in most cases, is based on Return On investment (ROI). ROI = Attributable Profit / Investment x 100. So an ROI of 25% basically says that you recoup your investment in 4 years. So how many years is acceptable? How long is a piece of string? If it is your business, once you have sold it at the best price you get, only then do you know what it was worth.

If you are an investor, at the outset you have an idea of what ROI you require, and then you search for something that fits your needs. The riskier the activity, the higher ROI must be. In SA, there are still deals that happen at 20% in a risky (?) niche like retail.

5. So if I have a startup and I have some forcasts that show that if I get X amount customers to use the service I will generate R13 milion revenue... how would I determine the percentage value to be sold to VC?

6. Originally Posted by Random Hero
So if I have a startup and I have some forcasts that show that if I get X amount customers to use the service I will generate R13 milion revenue... how would I determine the percentage value to be sold to VC?
It depends entirely on how much funding you require to get to that level of revenue, weighed against how much of a stake you're willing to give away in the company.

Typically when you value a growing company you will project your earnings over an initial "growth" period, taking into account all cash flows, both negative and positive. You will present value this using a discount rate that's appropriate to the company's risk profile (I assume this would be a pretty high % considering it's a startup). In addition, you'd determine a level of 'maintainable earnings' after the initial growth period and present value these earnings based on a standard growth rate into infinity.

The inputs into this calculation would be under much scrutiny, particularly by people looking to invest. They want a low price, you want a high price. Your ability to negotiate and motivate will land you somewhere in the middle. 😊

Other factors to consider would be how active the investors are going to be and what their required rate of return is. What are the repayment terms, when can they call it quits, etc.

The trickiest part with a start-up is probably estimating your cash flows into the future. If this is your first rodeo, expect to get it very wrong.

7. Originally Posted by Mark Atkinson
It depends entirely on how much funding you require to get to that level of revenue, weighed against how much of a stake you're willing to give away in the company.

Typically when you value a growing company you will project your earnings over an initial "growth" period, taking into account all cash flows, both negative and positive. You will present value this using a discount rate that's appropriate to the company's risk profile (I assume this would be a pretty high % considering it's a startup). In addition, you'd determine a level of 'maintainable earnings' after the initial growth period and present value these earnings based on a standard growth rate into infinity.

The inputs into this calculation would be under much scrutiny, particularly by people looking to invest. They want a low price, you want a high price. Your ability to negotiate and motivate will land you somewhere in the middle. ��

Other factors to consider would be how active the investors are going to be and what their required rate of return is. What are the repayment terms, when can they call it quits, etc.

The trickiest part with a start-up is probably estimating your cash flows into the future. If this is your first rodeo, expect to get it very wrong.
Hi Mark, good to hear from you again. I agree with those cash flow estimates. right now I only have forecasts, but I still need to determine what will be needed to rech those targets. I will drop you a PM.

8. There is a thing called reality, especially when projecting how many customers are going to sign up.

It is more difficult to get R20 out of some one every month, than to get R200. The main reason is the cost of the collection of the R20.00.
So do not count on the fact that it may be a low cost monthly purchase that will make everyone break your door down to get involved.
I had a project some years back which included a cellphone, and a registration to be able to get alerts of criminal activities in your street only, with a link to localized advertising via SMS.
The greatest obstacle which eventually became the demise of the system, was the R30.00 monthly subscription.

There is someone on this forum, who has been successful overcoming this hurdle, he may add further information to this thread.