Let’s say someone is valuing your venture for $1m and willing to invest $100k in your business, how much equity you should offer in exchange:
Our intuition says 10%, but that is incorrect and many enterpreneurs make this mistake. The correct equity stake is 9.1%, here is how it works:
1) Value of your enterprise (before investment also called Pre-money) estimated by the investor: $1,000,000
2) Money put in by the investor: $100,000
3) New Value (Post money valuation): Sum of above two, i.e. $1,1000,000
Equity held by the investor now = $100,000/$1,1000,000 = 9.1% (approx)
Or, to simplify it, you can calculate investor equity, as
= Investment/(Pre-money valuation + Investment)
Entrepreneurs need to keep the above in mind so that they don’t lose in the transaction.
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Filed under: Finance
