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Current time:0:00Total duration:11:54

Video transcript

where I left off in the last video my buddies and I we had a business plan we had a great idea to sell socks online we went to an angel investor he had originally given us five million dollars he'd valued what we already had at five million dollars so since he was giving us five million we had five million he got 50% of the company and we have the other 50% we have two million total shares and we took four of that million let's say six months have passed we hired 50 people and we finally built a working version of our website but we now are about to run out of cash we still haven't started selling things and we'll actually have to start selling a lot of things before we have enough money to support ourselves so we need to go start raising money again and we also want to spend money marketing and all the rest so we go to some professional investors we'll go to seed venture capitalists run into our series a round of funding which just means our first kind of professional venture capital round of funding we finally some guys find a team that they like us and we start getting to the negotiation they say you know what you guys say you need 10 million dollars we believe you we know that that's what it takes and we think you have a good business so let's see let me say that we need to raise 10 million dollars so that I make that clear and we need it for you know ongoing ongoing expenses and of course we'll have a big business plan and everything that further flushes this out and we also hat need you know we're going to do some marketing marketing etc etc so they say you know we have 10 million dollars and we think this is a hot space because we know those other VCS across the street also invested in an online undergarment play and we know that that's the hot thing right now so we are also going to do it so the question now is what do they get for their 10 million dollars so once again we get into this what is the company worth right now so once again they're going to do a pre-money valuation whoops pre-money valuation so what is this whole thing worth right now so that they'll say you know the idea is good you know we haven't you know they won't like break down they'll they won't say all the ideas worth 5 million and what you know but but the general idea is hopefully what from that stage where the post-money valuation was 10 million dollars right back here's ten million dollars then we did a bunch of work we use some of this five million dollars we did a bunch of work hopefully we added value if you know if we added value our our value of this stuff now this you know we turn this cash into other types of assets like a website and other things and and knowledge in our firm and expertise and all that stuff hopefully now what we have here is worth more than ten million dollars right otherwise we kind of destroyed wealth we were kind of we were we were and all of this is very you know it's kind of it's very intangible it's very hard for someone to really place a value on things at this point a lot of VC's they kind of swing for the fences they're like you know what these guys have a 10% chance of being worth a billion dollars and a 90% chance of we're being worth zero if I make ten of these bets at least one of them is going to pay off and make my whole fund and so that's how they kind of think so at this level you know they'll do some hard negotiating but it oftentimes is going to not at this level this is where we are right now it's kind of what other people got for this stage of a company they say oh you know you have a pretty good built out website those other guys who had a pretty good wood built out website at this point you know those are those guys across the street they had to pay they have to give a twenty million pre-money valuation but you know you guys are are a little bit you know your market isn't quite as big as the broader undergarments market you're just socks so you know the opportunity isn't as big so we'll give you will give you a fifteen million dollar pre-money valuation fifteen million so what they they're saying that what we have right now is worth fifteen million dollars and that's pretty good that's I mean if you if if that were reality if that really is worth fifteen million dollars then what are our shares worth right now notice they haven't given us any money this is the pre-money valuation so fifteen million dollars divided by two million shares right that's how many we have right now so what is the value per share fifteen million divided by two is what seven seven fifty per share that's pretty good because back here remember this this is kind of a scenario that didn't happen that was kind of a negative scenario but back here when we the pre-money was five million dollars four million shares was Phi dollars per share and then it became ten million dollars for two million shares still five dollars per share but before and after this round that angel said oh you know your shares are worth about five dollars per share now this VC who's a professional investor and has teams of MBAs making spreadsheets for him says that actually what we have right here is worth 750 a share so just over that six those six months we actually got a fifty percent return on our shares if you believe that and you know the angel investor is happy he he feels good about it he got this was vindication for his his bet on us so we feel good we feel like we've given him at least in the short term of return so anyway we got a fifteen million dollar pre-money valuation and I'll let you think about this when what's the post-money valuation what happens when you layer on the ten million dollars from this venture firm the ten million actually just to make it simple to make the math simple let's say that we're raising seven and a half million let's say that we wanted ten million but we were we were hoping for 20 million pre-money valuation because that's what the other guys got and since they're only giving us a 15 million pre-money we just don't want to take as many shares from them because we don't want to give as much of the company way so we're just going to take seven and a half million because we think that's just enough that we need to keep going so we do that we take seven and a half million dollars from this seed venture capitalists we take seven and a half million dollars and he essentially valued our old chairs at at 750 per share so for seven and a half million dollars 750 per share he should get another million shares so what we're going to do this angel investor is probably sitting on our board now because he owns so many of the shares the board of directors of a firm is essentially elected by the shareholders so if you have 50 percent of the shares you can put yourself on the board and you could probably put some other people on the board of directors as well so this is so he'll so we had two million these guys get a million how many shares do we have now we now will have three million shares so we have to issue another million shares and what is our post-money valuation pre-money was fifteen we have seven and a half million dollars now our post-money valuation is 22 and a half million dollars and now what is how much what percentage do each of us own so the angel investor owns 1 million not out of 2 million shares like he used to he now owns 1 million out of 3 million shares so now he owns 30% he owns 30% the seed VC he has a million out of out of 3 million so he owns what this is 33 and 1/3 percent the CBC owns 33 and a third present and then me and my buddies we collectively own 33 and a third percent and I have a fifth of that so I have a little over 5% so the founders that's us we still have about a third of the company and now we have the 7 and a half million we just Reyes plus we have the million dollars of cash that we had before we have 8 and a half million dollars to to keep on going with our with our business fair enough so let me draw so let's say another 6 months go by so our old balance sheet so let me draw all of the shares I want to do a couple of more rounds of financing before I take the company public let's say so that's you know this is my slice down here 200,000 this is the angel investor this is the seed VC and then of course let's say after I don't know another 6 months we burnt through the cash we have you know we that we've marketed the website we have only a million dollars left and that's usually our trigger point for when we want to raise more money in fact we probably would have to do it at 2 million because we've raised more employees and we're burning more cash or cash burn is essentially how much cash is going out of the door every month because your business still isn't making money and of course you have all of the assets of the firm which essentially you know it's a website and offices and the knowledge some of it intangibles so you know you know website and everything that comes in with it your brand now you probably have because you've marketed so people recognize Sox online.com I don't want to get you know I don't know if that exist so you know forgive me if I'm actually somehow insulting a real business out there but you know you have a brand now and so you're almost ready actually generating revenue but you're still kind of cash flow negative you're generating you're burning less money because people are actually going to your site they're buying stuff but you just need a little bit more money you think to get profitable right that's you know once you get this amount of money you're ready to go so you got another VC once again a lot of them turn you away but one guy finally says ok I'll give you some money and you say you know I need five million dollars this is fair enough I'm going to value your your business at and let's say you know we're in optimistic world so we're doing up rounds up rounds or when you're pre-money valuation of this round is more than the post-money valuation of the last round right so the value is going up your jet creating value it would be a down round like here they valued us at fifteen million dollars right while the post money of our last round was ten million so that was an up round if these guys said no way think the world has changed we're only going to value all of this stuff at eight million then that would be a down round and no one's happy about that and we'll talk about the repercussions of that in the future why down rounds aren't good so oftentimes you actually don't want to get too good of a valuation because if you get too good of a valuation in the next round it might be hard to give get people who can give you another a better valuation so you might be forced to take a down round which which has negative aspects but this quick-and-dirty you need your prominent brand now it's a little easier for you to raise money you go to some VC who specializes in kind of helping people get to that profitability stage and what you do is you raise your series B and just put it simply it's an up round your post money from your last round was twenty two and a half million right twenty two and a half million you've generated some value so now they say you know what your business is worth thirty million and you know you need some another ten million to really pump up the marketing so you need another ten million ten million ten million to pump up the marketing how many shares do they get well the pre-money was 30 million we had 3 million shares so they're assigning us a value of essentially $10 a share which is great remember the first round the angel gave us $5 per share second round we got 750 per share and now we're getting $10 per share so if we're selling him shares at $10 per share we just have to shoot another million shares to get 10 million dollars so another million shares and this goes to VC to the second VC and that's our Series B we raised 10 million dollars fair enough so we've done one round of angel investing and then we've gotten our series a that gave us the seven and a half million dollars and we did our Series B that gave us 10 million and we could keep doing the Series C Series D and so on and so forth and I'll continue this in the next video