It all starts with a Vision, Project, Product, Service
No one has ever done it before…. Unbelievable!, It’s so painfully Obvious, Can you pull it off??? Perhaps?! You and your friends, get excited, design a cool logo, think of a name, all fun and games are at play, designed a concept. Things get serious, You decide to make it a company.
You need structure, a legal Structure, How much will it cost?
In India, the incorporation of the company will cost you between 4000/- INR($ 54 in USD) to several thousand Rupees. Part of the money goes to the registration fee, which depends on the location you are in. Legal fees depending on how fancy you need your first channel agreement to be.
Your company proves to be on the expensive side.. also, you’ll need to rent a server in order to develop your product. Therefore, you need to take money from other people, Your enterprise is still in the beginning. Who will ever give you money?
Maybe from parents, friends or by crowdsourcing.. you never know, you got to try.
Typically, a newly established company issued approximately 100,000 shares, which represent equal pieces of property. You have to decide how many and who will get them.
Let’s say you agree to distribute 40% of shares to each founder and 20% for the rich family or a friend who buys them for 50,000. This is called investment and in such an early stage of your start-up is called “Seeding Investment” — or SEED.
The money he pays now become the property of the company. If it fails in the near future, which statistically speaking is the most likely scenario, you’ll probably never see a dime from them. 50,000 for 20% of the company, Puts the value of your company at 250,000 valuating, Which puts the value of your 40% at 100,000. Not bad, not bad at all.
Please sign here, here and here. Congratulations, you incorporated your company and finished your seed round of investment.
A year has passed, You’re having a successful beta trial period with customers.
Time to hire few more staff and to rent not only a server but also an office space. 50,000 of seed capital has only gotten you so far. Time to collect his first big round of cash.
You will do this in so called Series A investment round. You’re looking for an investment of one million. This time you connect with Angel Investors and Venture Capitalist, or VC’s in short.
VC’s are people who work for venture capital firms which raise venture capital funds. They take money from other people and then invest in young risky companies similar to yours.
Angel Investors are individuals who invest their own professional capital into young companies. Often they are former entrepreneurs who have successfully sold his/her own company years ago And now looking to support early ventures.
You contact a few Angels and VC’s. Some you have found on the internet and the others through other friends and colleagues.
You begin to send emails. Send your business plan.
Usually, they don’t care for business plan much. They see if the team is competent. The idea, is it special? They know it’s not easy. What have you achieved so far? Is it promising? What more can you achieve? Can you dream big?
You run through several Skype conversation. Few generalities, and many business talks. Explain your idea? A piece of cake. You’ve done it countless times by now. They ask you tough questions, such as whether you have heard about this other start-up similar to yours. Is your idea any different from the others?
You’ve have sparked their interest.
Receive a second call.
They might invest…. Time to talk about the valuation of the company. There are two types of valuation: Pre-Money valuation and there is Post-Money valuation. The Pre-money valuation of your start-up is what you are currently valued at. The “Post-Money” valuation is “pre-money” + investment that you want to take. This is what you usually mention while negotiating.
Because investment divided by the post-investment, valuation is equal to the investor shares in your start-up. Investors usually strive for low “Post-money” valuation to receive a great return.
You want the opposite, in order to keep a larger share. You suggest a“ Post-Money” valuation of $ 8 million. For investors who gave 1 million received a 12.5% stake in your company.
After several weeks in, you see two proposals on your desk. One VC proposes to invest 1 million for a “post-money” valuation of $ 6 million.
An Angel that you talked to, offers to invest $500,000 for $5 million post-money valuation. At first glance, the offer of venture capitalists look like a good deal, but the angel has much better relations in the industry.
This is called: ‘Smart Money’
What are you going to do? Deciding to take advantage of both. You tell the angels that there is another offer for an assessment of $6 million, but you would be very happy to be a part of their team as well.
If she/he agrees to invest in evaluation $6 million “post-money”.
How many pieces should we cut the cake then?
Let’s do the math.
Together, VC to and Angels will invest $1.5 million in your business with the assessment of $6 million post-money valuation. This means that they will have a total of 25% of the company.
You, The Co-Founder, your family and your friend are holding 100% of the company together. When new investors come you will be “diluted”. After this new investment, your share will become 75% of the company.
This “dilution’’ happens proportionally. Here’s how it works. As the first company issued 100,000 shares when you created it, now with the arrival of new investors, you will issue new shares that they would buy.
The company can create shares just as easy as how the central bank prints money. Only change the total number and your number remains the same.
How many shares has the company issued?
If the 100,000 shares now equal to only 75% of the company, this means that 100% of the company now would be the equivalent of 133,000 shares.
Therefore investors receive 33,000 newly issued shares for their investment. Having invested a total of 1.5 million for their shares, each share will now cost 45 dollars.
Your 40,000 shares now worth 1.8 million. Congratulations!
This whole process of issuance of shares by the company to get cash is called Capital Rise.
If things go well, Series A won’t be the last raised capital for your startup. There will be Series B, C, D, etc.
With each subsequent series of investments, the value of your company is likely to grow. Also, with every investment, you will “dilute” more and more. Remember as I said, the number of shares you own remains the same right?
Over time, there will usually be stock split in the shares, which convert each share into more shares. From here your number of shares doubled, tripled from time to time, together with the shares of each other.
You don’t care much for the legal work anyway. Your primary goal is to develop your business, which is poised to conquer new peaks.
It’s been six years from when you founded your company.
Successfully completed 4 series of investment by then. Your product is already on the market and... guess what your … customers love it.
Enjoying great success. Great blogs write about you.
The most important is that for the first time last quarter, the company hasn’t lost money. Your business made a profit. It is time to “Exit”.
“Exiting” the company is a term that investors use when they sell their shares. Anyone who has invested cash in you from the beginning dreamed of profits.
The earlier investment equals a great risk and accordingly those investors will receive more profit if the company is to develop.
Usually, there are 2 ways “exiting” from the company.
One is to sell your company to one of the bigger companies in the industry.
The other is to offer it on the Stock Market.
If you sell your company to a bigger company, investors will usually sell all your shares at once. You and your colleagues usually can’t. Whoever decided to buy your company, will want you to stay motivated to manage the entire enterprise. Therefore, your shares will be transformed into those of the company that bought you.
Then, you will be granted gradually over time.
This is called “Vesting” of the shares.
If you leave early or fail to comply with any requirements that are agreed upon, you will not get any shares. Much cooler way out is to grow big so that you can sell the company on the stock exchange. This process is called an initial public offering or IPO short.
In essence, it is merely another form of Capital Rise. Here again, your company issue new shares with the difference that this time the investor is neither angel or VC, It’s the public.
The day you decide go public, the company you issue a number of new shares on the market and from there people can buy them and sell to each other.
In addition, you possess marketable securities that are almost as good as money in cash. Their price varies every day. You can sell shares on the stock market at a market price any time.
You can sell your shares are starting price of $ 64 dollars and go up to $ 70 on the first day of trading. Because stock splits along the way, you now have 10 million shares of your company.
Your personal wealth exceeds $ 700 million. You could also cash in, but do you really want it?
It was like yesterday when you two had only one dream.
Now you’re one in a million.
You have achieved a lot and still, countless things to do.
Although investors call “out” for many entrepreneurs this is just the beginning.