14. Ownership Calculations

Overview

In this lesson, we calculate the ownership stakes for the founder and investors, building a simple model to examine different investment options and scenarios.

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Summary

  1. Lesson Goal (00:04)

    The goal of this lesson is to analyze the impact of the transaction structure on the ownership of TrackerTime.

  2. Calculating Ownership Stakes (00:27)

    Our objective is to calculate the percentage of the company that each party will own after the transaction is complete. To do this, we need to know the number of shares held by each party prior to the transaction. We need to know the pre-money valuation, which is the valuation of the company before the transaction takes place. This allows us to calculate the price per share, by dividing the pre-money valuation by the total number of shares currently in circulation. Finally, we need to know the amount of existing shares that will be sold, and the amount of new shares that will be issued.

    We can then calculate the number of shares each party owns after the transaction. SeedCo are not buying or selling any shares in this transaction, so their number of shares does not change. To calculate Mary Hernandez’ shareholding, we divide the value of shares she is selling by the price per share, and subtract this amount from her existing number of shares. Finally, Ventura’s shareholding is equal to their investment amount divided by the price per share. 

    After calculating the number of shares each party owns, we calculate their percentage of shares by dividing their number of shares by the new total number of shares.

  3. Analyzing the Impact of Dilution (03:11)

    When new shares are issued, the value of a share decreases for all shareholders. As a result, the actual stake received by a venture capital investor may be less than they expect. In our example, Ventura expected to receive a stake of 10% for their $20m investment. However, the issuing of new shares means they only receive 9.8% for their $20m. If we structure the investment to include fewer new shares, then Ventura receives a higher percentage stake in TrackerTime for the same level of investment.

  4. Adjusting the Pre-Money Valuation (04:05)

    In many cases, an investor will want to receive a specific stake in a company when they make their investment. For example, Ventura wants to end up owning 10% of TrackerTime for their $20m investment. To achieve this, we need to reduce the pre-money value of the company, and by extension the price per share.

    We can do this in Excel using Goalseek. We use Goalseek to set Ventura’s final stake to the desired amount by adjusting the pre-money valuation. This produces a lower pre-money valuation for TrackerTime than the CEO had proposed, but she is still happy to proceed with the deal.

Transcript

In the previous lesson, we discussed where tracker times CEO, possibility of selling some shares to Ventura, along with issuing new shares at the company level. This would allow Mary to get a cash sum upfront personally and still leave enough cash in the business to grow aggressively in the coming years. Lets now build this logic into our model to allow for this calculation. And I'll start by off-camera entering Mary and SeedCo's total number of shares and current percentage holdings.

As you can see, there are 1,000,000 total outstanding shares and SeedCo owns 150,000 of these shares. The pre-money valuation that Mary has put on the business is 190,000,000.

And as per the CEO's wishes, I'm going to say that 5,000,000 will be bought from existing shareholders, and 15,000,000 for Ventura, will come from newly-issued shares. With this 15,000,000 ending up on the company's balance sheet. The price per share will simply be equal to 190, multiplied by 1,000,000, divided by the number of outstanding shares. With this information, we can now calculate the ownership stakes for Mary, SeedCo and Ventura after the investment takes place. I'll start with SeedCo, which is simply equal to the same number of shares.

And then I'll enter Mary's figure. To calculate this figure, I simply take the total number of Mary's current shares and subtract a formula. And the formula will simply be the amount that Mary is going to sell, which is 5,000,000, divided by the price per share. Because in this scenario, I'm going to assume that the price per share that Ventura purchases from Mary and purchases from the company is the same. And this gives me a figure which is lower than the initial 850,000 of 823,684.

Next, I calculate Ventura's ownership stake, which would simply be equal to the investment amount, which I'll need to multiply by 1,000,000, divided by the price per share.

And then I'll sum for the total outstanding amount.

And I'll also calculate the percentage.

And I'll copy this formula, for the remaining sales.

As you can see from our calculations, Ventura's stake is slightly lower than 10%. It's always best to build out a simple model, such as this one, to confirm exact ownership stakes. One important item that Ventura has overlooked in it's deliberations are the benefits of not issuing new shares. Under the current scenario, the company is only issuing 1,078,947 shares.

If I revert to Ventura's original plan, which was to issue 20,000,000 in new shares, then we're going to have a higher total of outstanding shares, and as a result, Ventura's ownership stake drops from 9.8 to 9.5%.

And so the more that Mary sells to Ventura, the bigger it's stake, because the total number of outstanding shares will be lower.

When we explain this to Ventura, they are still happy to proceed with the deal, but only as long as they can get 10% ownership of the company. To find out the pre-money valuation required for Ventura to hit 10%, we're going to use Goal Seek. But first, I'll enter the ownership stakes that we want for Mary and Ventura.

Which is going to be five and 15. Now let's use Goal Seek. So the number that we want to reach 10% is here. So I'll press Alt A W, G for Gold Seek. And the set sale would be L6, and we'll set this value to 10%, and we're going to change the pre-money valuation sale to reach this number.

And when Goal Seek is finished, it finds a solution of 184.9 million as the pre-money valuation. Mary is happy to go ahead with this deal, even though the pre-money valuation is under her original target.

As you can see in this lesson, it's very difficult to calculate these seemingly easy percentage ownership calculations in your head. Although it takes more time, it's always better to write down a quick model in full in Excel, focusing on the number of shares before calculation the percentages. This will help you avoid any errors and potentially help you close the deal, as shown in this example.