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Selling shares to finance the company startup • Now come a most critical question: Can we finance the company by selling shares without loosing control? • It is often accepted that the GeneralManager should retain 2/3 of the company in the first round of financing. • Will the company generate so much profit that 1/3 is enough to give enough return to the investor putting up the capital needed? •08.08.00 Let’s have a look on our case LMKs method step 7 Investor Return for investor Accumulated loss Sum Assets 0 0 0 0 Liabilities 0 Short term bank loan, percent. of sales after 3yrs 0,05 short term misch.tax credit 0 Accounts payable, fixed costs, days 30 Accounts payable, product production costs,days 30 Sum short term liabilities 0 0 0 Long term risk loan from Aunt Maggie 0 Accumulated profit 0 0 0 Capital needed, accumulated 0 580 756 0 0 0 50 58 3 111 0 100 0 0 545 1 354 1 718 0 0 0 100 121 12 233 0 100 0 0 1 385 1 354 2 071 0 0 0 150 178 37 365 0 100 5 0 1 600 1 354 2 496 0 0 270 200 245 74 789 0 100 1 588 0 19 1 354 2 886 0 0 377 300 306 99 1 082 0 100 4 254 0 -2 551 Profit before tax 0 -580 -774 5 1 583 2 667 25 % 136 136 346 482 400 883 400 1 283 400 1 683 0 0 0 0 2 7 528 2 110 889 3 555 Imaginary interest on capital needed, percent. Accumulated 1/3 of profit will cover a principal of xx, at rate 08.08.00 25 % LMKs method step 7 Investor Many ways to look at a company • In our case we see that the investor after year 4 has put something less than 3 mill into the company, including the missing 25% interest. • In year5 (and we presume the following years) 1/3 of the profit (we disregard the tax here) will provide interest at 25% pa for more than 3 mill. • So investor can get aprox 25% on his investment.( if plan is as solid as The Federal Reserve) • Is this enough?? • Investor may be looking for 10x input in 3 years ! 08.08.00 LMKs method step 7 Investor Value of our case Profit before tax 0 -580 -774 5 1 583 2 667 • We can calculate the value of this money stream, assuming the last year to continue indefinitely, or a fixed number of years, with a given rate of return • Or we can calculate the value based on P/E=4 (25% pa profit) • According to this the company is worth 10,7 mill which is far from the investors dream of 1,6x3x10=48 mill. • Does the investor believe in the GeneralManager’s capabilities for building a profitable business? 08.08.00 LMKs method step 7 Investor Completed plan: Change “Capital needed” to “Common stock” and “Additional paid in capital”, as well as fill in “Extra cash” • This plan would be regarded as marginal. • Too low sums for professional investors • Not high enough growth potential • Try again! 08.08.00 LMKs method step 7 Investor