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Current time:0:00Total duration:12:02

Video transcript

let's say I'm hanging out my buddies one night and we realize that there's a huge opportunity in selling socks online socks online and so we decided to start a company so the first thing we would do is we would write a business plan and say you know what in this business plan writing process this is all we've all contributed to it individually so we'll all be equal shareholders let's say there's five of us friends so the first thing we want to do is we want to start a well you know you could do it in different orders you could just write up a business plan or you can start the corporation but what does the soom that we start a corporation and I'm going to indicate the corporation by kind of creating a balance sheet right from the get-go so what are the assets of the corporation and what are the debt OS and what are the liabilities and we could talk a little bit about what a corporation even is so it's asset to begin with the asset to begin with is essentially just an idea I mean you could say it takes physical form into some degree in the business plan but it's just an idea at first and then there are no immediate liabilities it doesn't owe anybody any money and we learned in the balance sheet videos and you might want to watch the balance sheet videos as a prerequisite to this one but in general assets are equal to liabilities plus equity all right so we have no live so this is the assets the only asset we have right now is our idea maybe you want to add you know the potential talent that we have maybe unique skills they're very intangible at this point unique skills these are the assets that our 5 buddies have together and we have no liabilities we didn't sound like we borrowed money or anything so everything we have so the assets are equal to our equity our equity and I'll do that in let me do it in a brown color so there's no liabilities and we just have equity and equity is essentially what the owners of the company have the right to for example if I haven't assigned any numbers here that I did that for reason but if the assets were I don't know ten million dollars and liability was five million dollars if we had owed five million to someone then you would have five million left for the equity and that's what the owners of the company would have me at nine five buddies or like I guess my four buddies we decide we're the owners of the company so we'll have eat will be equal shareholders so we would split the equity between us five ways so we just pick an arbitrary number let's say to begin with we have a million shares so each of these each of us have 200,000 shares in the company and that's a bit of an arbitrary notion and you normally do assign some value to those shares initially you know it's some pennies per share but I won't get into the dick into the technicalities of that just fair enough to say that we've we each have 200,000 shares in this company and some of them go to me and then the rest I'm go to buddy one buddy - buddy three and buddy 4 this is the equity right here right and there's a total of 1 million shares outstanding 1 million shares outstanding good enough well you know just an idea and some paper and some well-intentioned individuals alone isn't enough to start a company we're going to have to create some type of own online presence and do some programming and maybe have a warehouse and do some marketing so we're going to have to and and really we're gonna have to quit our job so that we can work on this full-time so we're gonna have to raise some money money to to hire some engineers so that we can quit our jobs to hire some marketing people etc etc so where do we get our money from so this is where the whole venture capital world comes into the picture venture capital and you've heard the word before and I think you had some sense of what it is and the venture capital world it's kind of separated into different people who invest at different stages venture capital so you'll have people that they're called angel investors and sometimes these people won't even call themselves venture angel angel investors angel investors and these are the guys that are kind of these you know I don't want to stereotype it but they'll be kind of like the the the old guys who made it big in the 80s and now they're sitting on billions of dollars and they want to participate in the neat ideas that that young guys like me and my friends think of and so you know they're kind of like your rich uncle says oh that's a great idea I'll throw some money behind and they usually invest at a very early stage so those are probably the people we would go to initially and then we'll talk to the net to the people after that the other types of venture capitalists but in general the you know these things that venture capital can mean a lot of things but it means someone who's going to give you money they're going to take a stake in your company and hope that your give you enough money to kind of get your venture going to kind of start your business so let's say we go to an angel investor and we say hey angel investor don't you think this is a great idea we're going to sell socks online you know socks or something people run out of it every way we can even do subscriptions for socks you know you get you get 10 pairs a month etc etc you can give them as gifts all of these lovely things and you know the first the first nine guys slammed their doors at our face you think our business plan is stupid but the 10th guy says hey you know that's that's interesting so we enter into negotiations and he's like you know what I'm going to invest but we have to figure out what I'm going to get in exchange for investing in your company how much of your company I'm going to get and so this this leads to a process of valuation so let's say we say we need five million dollars from the angel investor to get started right we need five million dollars let me write that down five million that's what we say we need and that's what the angel investor says that he's willing to give us because he agrees you know five million dollars that's enough for us to quit our jobs and then we could all take salaries you know for some time we could hire a bunch of people we can rent office spaces and do everything you need to do to start a company and five million dollars will support that for I don't know a year or two I don't know depending on how many expenses we have but the question is what does he get for that five million dollars so in order to come to that conclusion you have to determine what is what we have before he came to the picture worth right notice when I did this balance sheet I didn't even write what these assets are worth what is this worth and this value this is called a well in general whenever you're valuing anything it's called a valuation valuation valuation and since we want to know what this is where this is before we got any kind of money from investors this would be called a pre-money valuation pre-money pre-money valuation and I'll show you why that matters in a second because if us and this angel investor agree that this you know our assets before we go to them are worth five million dollars so if we agree that they're worth five million dollars let me let me draw that so what color was I doing that in it was in yellow so if we agree let me draw a little bit smaller so essentially it's just an idea and then we have the shares a million shares of that million I have two hundred thousand right the rest other eight hundred thousand are with our with my friends these are 1 million shares total or shares outstanding so if this idea we agree with the with the angel investor if we agree that this is worth five million dollars if we agree that this is worth five million dollars so everything we have today is worth five million dollars then when he gives us another five million dollars that's an asset right we'll have five million dollars in cash so he'll give us another five million dollars he'll essentially get fifty percent of the company he'll get all of these shares up here now how does that work out well if you think about it this is this is the post post money company right so let's think about it a couple ways if this is five million dollars that's the idea what is the five million dollars worth and that's not a trick question it's worth five million dollars right it's worth five million dollars so what is the post-money valuation we talk about valuation we're talking about the value of the assets especially because we're not dealing with any debt right now everything on the right hand side is equity so this is all equity let me write that no no liabilities yet and in general when you're doing a start-up company if if you know I want to start if I want to start start Sox online.com and I go into my local bank and say hey give me a loan this is they're just going to turn you away because if you have a venture that really doesn't exist yet and has no cash flow they know that you're not going to pay the interest on the debt so you're not going to even be able to raise debt until you're a more mature company or until you you know maybe you could post some collateral and I'll talk more about that maybe you could say hey you know I'll use my house if I don't pay the debt you can take my house or something like that but for the most part we don't want to do that so the only way to raise money at this early stage is by issuing equity so going back to what we were talking about what is the post-money valuation we said before any of this stuff on the top existed the pre-money valuation of just our idea was five million dollars now the angel investor if we value this at 5 million he'll give us 5 million more what is the total value of all of the assets now well if we said this was 5 million that's just something agreed with this is worth 5 million so the combined assets if you believe that this is worth 5 million is now 10 million dollars right and this would be the post-money valuation post-money valuation and if you think about it if you think about the the company in this form right now we me and my buddies we've contributed half of the value of the company and this this this rich guy he's contributed the other half of the company so it makes sense that he he has 50% of the company so how is that going to work well I don't give away any of my shares and neither are any of my friends they're all going to keep their shares so let's see we had five chunks of $200,000 that went to hundred thousand shares that went to each of us all right that was buddy one two three four what we'll do is we'll actually issue another million shares and give it to this rich dude so this is another 1 million shares so as the company board you can actually authorize to create shares and that's what we did and we essentially sold those shares for 5 million dollars so now instead of having 1 million shares you have 2 million shares so something interesting here and some people often talk about the notion of die Lucien right because before I had 200,000 out of a million shares so before I had 20% 20% of the company and now what do I have well we've essentially doubled the share count so now I only have 10% of the company so some people says oh you know what my share of the company got diluted but it really isn't the case because the company has gotten all this cash right I now own 10% of something that's twice as valuable as opposed to 20% of something that's half as valuable if you really believe that then this was no change right I now own 10% of 10 million which in theory should be worth a million dollars before I owned 20% of five million which was also worth a million dollars so if you believe these valuations I probably I'm neutral and we're going to put this five million dollars to work and actually let me let me take a step actually if now I just realized I'm out of time let me continue this in the 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