How to calculate a good business deal? Entrepreneurs vs Investor

1. How to calculate a good business deal
Entrepreneur vs Investors

2. Seed Series A Series B M&A Cash
out
Value X RRC
Cash needed $2M $7M $50M
Valuation pre-money
Valuation post-money $200
M
Founders
Inv. seed
Inv. Series A
Inv. Series B
x1,5
9m + 3m
x2,5
21m + 3m
x2
24m
1. As a founders, we calculate the cash needed for the 5 next years before to be acquired
$2M + $7M + $50M = $159M
2. Today on TechCrunch, a similar company is acquired by a big corporation for $200M
3. Times: From Seed to Series A: 9months + 3months (finalizing next deal)
From Series A to Series B: 21months + 3months (finalizing next deal)
From Series B to M&A: 24months
4. IRR “Internal Rate of Returns” for the investors will be:
1. Investor 1 x1,5 in 1year ≈ 80%*
2. Investor 2 x2,5 in 2years ≈ 60%*
3. Investor 3 x2 in 2years ≈ 41%* *Look at the RRC table

3. Seed Series A Series B M&A Cash
out
Value X RRC
Cash needed $2M $7M $50M
Valuation pre-money
Valuation post-money $100M $200
M
Founders
Inv. seed
Inv. Series A
Inv. Series B
PREM&A = $200M $200M / 2 = $100M
x1,5
9m + 3m
x2,5
21m + 3m
X2
24m

4. Seed Series A Series B M&A Cash
out
Value X RRC
Cash needed $2M $7M $50M
Valuation pre-money $50M
Valuation post-money $20M $100M $200
M
Founders
Inv. seed
Inv. Series A
Inv. Series B
PREM&A = $200M $200M / 2 = $100M
PREB = $100M - $50M = $50M $50M / 2,5 = $20M
x1,5
9m + 3m
x2,5
21m + 3m
X2
24m

5. Seed Series A Series B M&A Cash
out
Value X RRC
Cash needed $2M $7M $50M
Valuation pre-money $6,6M $13M $50M
Valuation post-money $8,6M $20M $100M $200
M
Founders
Inv. seed
Inv. Series A
Inv. Series B
PREM&A = $200M $200M / 2 = $100M
PREB = $100M - $50M = $50M $50M / 2,5 = $20M
PREA = $20M - $7M = $13M $13M / 1,5 = $8,6M
PRESEED= $8,6M - $2M = $6,6M
x1,5
9m + 3m
x2,5
21m + 3m
X2
24m

6. Seed Series A Series B M&A Cash
out
Value X RRC
Cash needed $2M $7M $50M
Valuation pre-money $6,6M $13M $50M
Valuation post-money $8,6M $20M $100M $200
M
Founders 76,8%
Inv. seed 23,2%
Inv. Series A
Inv. Series B
PREM&A = $200M $200M / 2 = $100M
PREB = $100M - $50M = $50M $50M / 2,5 = $20M
PREA = $20M - $7M = $13M $13M / 1,5 = $8,6M
PRESEED= $8,6M - $2M = $6,6M
Seed %F= $2M / $8,6M = 23,2% - 100% = %S = 76,8%
x1,5
9m + 3m
x2,5
21m + 3m
X2
24m

7. Seed Series A Series B M&A Cash
out
Value X RRC
Cash needed $2M $7M $50M
Valuation pre-money $6,6M $13M $50M
Valuation post-money $8,6M $20M $100M $200
M
Founders 76,8% 49,92%
Inv. seed 23,2% 15,8%
Inv. Series A 35%
Inv. Series B
PREM&A = $200M $200M / 2 = $100M
PREB = $100M - $50M = $50M $50M / 2,5 = $20M
PREA = $20M - $7M = $13M $13M / 1,5 = $8,6M
PRESEED= $8,6M - $2M = $6,6M
Seed %F= $2M / $8,6M = 23,2% - 100% = %S = 76,8%
Series A %A = $7M / $20M = 35% - 100% = %F+S = 65%
%F= 65% * 76,8% = 49,92%; %S = 65% * 23,2% = 15,8%
x1,5
9m + 3m
x2,5
21m + 3m
X2
24m

8. Seed Series A Series B M&A Cash
out
Value X RRC
Cash needed $2M $7M $50M
Valuation pre-money $6,6M $13M $50M
Valuation post-money $8,6M $20M $100M $200
M
Founders 76,8% 49,92% 24,96%
Inv. seed 23,2% 15,8% 7,9%
Inv. Series A 35% 17,5%
Inv. Series B 50%
PREM&A = $200M $200M / 2 = $100M
PREB = $100M - $50M = $50M $50M / 2,5 = $20M
PREA = $20M - $7M = $13M $13M / 1,5 = $8,6M
PRESEED= $8,6M - $2M = $6,6M
Seed %F= $2M / $8,6M = 23,2% - 100% = %S = 76,8%
Series A %A = $7M / $20M = 35% - 100% = %F+S = 65%
Series B %B = $50M / $100M = 50% - 100% = %F+S=A = 50%
%F= 50% * 59,92% = 24,96%; %S = 50% * 15,8% = 7,9%
%A= 50% * 35% = 17,5%
x1,5
9m + 3m
x2,5
21m + 3m
X2
24m
%F= 65% * 76,8% = 49,92%; %S = 65% * 23,2% = 15,8%

9. Seed Series A Series B M&A Cash
out
Value X RRC
Cash needed $2M $7M $50M
Valuation pre-money $6,6M $13M $50M
Valuation post-money $8,6M $20M $100M $200
M
Founders 76,8% 49,92% 24,96% $49,9M
Inv. seed 23,2% 15,8% 7,9% $15,8M 7,9x 52%
Inv. Series A 35% 17,5% $35M 5x 50%
Inv. Series B 50% $100M 2x 41%
PREM&A = $200M $200M / 2 = $100M
PREB = $100M - $50M = $50M $50M / 2,5 = $20M
PREA = $20M - $7M = $13M $13M / 1,5 = $8,6M
PRESEED= $8,6M - $2M = $6,6M
Seed %F= $2M / $8,6M = 23,2% - 100% = %S = 76,8%
Series A %A = $7M / $20M = 35% - 100% = %F+S = 65%
Series B %B = $50M / $100M = 50% - 100% = %F+S=A = 50%
x1,5
9m + 3m
x2,5
21m + 3m
X2
24m
%F= 65% * 76,8% = 49,92%; %S = 65% * 23,2% = 15,8%
%F= 50% * 59,92% = 24,96%; %S = 50% * 15,8% = 7,9%
%A= 50% * 35% = 17,5%

10. Seed Series A Series B M&A Cash
out
Value X RRC
Cash needed $2M $7M $50M
Valuation pre-money $6,6M $13M $50M
Valuation post-money $8,6M $20M $100M $200
M
Founders 76,8% 49,92% 24,96% $49,9M
Inv. seed 23,2% 15,8% 7,9% $15,8M 7,9x 52%
Inv. Series A 35% 17,5% $35M 5x 50%
Inv. Series B 50% $100M 2x 41%PREM&A = $200M $200M / 2 = $100M
PREB = $100M - $50M = $50M $50M / 2,5 = $20M
PREA = $20M - $7M = $13M $13M / 1,5 = $8,6M
PRESEED= $8,6M - $2M = $6,6M
Seed %F= $2M / $8,6M = 23,2% - 100% = %S = 76,8%
Series A %A = $7M / $20M = 35% - 100% = %F+S = 65%
Series B %B = $50M / $100M = 50% - 100% = %F+S=A = 50%
x1,5
9m + 3m
x2,5
21m + 3m
x2
24m
Conclusion: This is a great deal! The proposal for the investors is:
Seed Investor: for $2M you’ll return $15,8M in 5 years = IRR 52% 7,9x
SeriesA Investor: for $7M you’ll return $35M in 4 years = IRR 50% 5x
SeriesB Investor: for $50M you’ll return $100M in 2 years = IRR 41% 2x
%F= 65% * 76,8% = 49,92%; %S = 65% * 23,2% = 15,8%
%F= 50% * 59,92% = 24,96%; %S = 50% * 15,8% = 7,9%
%A= 50% * 35% = 17,5%

11. Seed Series A Series B M&A Cash
out
Value X RRC
Capital needed $2M $7M $50M
Valuation pre-money $6,6M $13M $50M
Valuation post-money $8,6M $20M $100M $200
M
Founders 76,8% 49,92% 24,96% $49,9M
Inv. seed 23,2% 15,8% 7,9% $15,8M 7,9x 52%
Inv. Series A 35% 17,5% $35M 5x 50%
Inv. Series B 50% $100M 2x 41%
x1,5
9m + 3m
x2,5
21m + 3m
x2
24m
• Now you are a Seed investor trying to figure out you shares % in each series:
• You can invest $2M and expected return will be $12M in 5 years.
• What’ll be your % share en each round?
• M&A: $12M / $2M = x6 ≈ you will expect 43%*
• The expected value at M&A will be $300M -> $12M / $300M = I need to have 4% at the M&A
• I assume that my dilution at Series B will be 50%:
Shares at the M&A 4% / .50 = I need to have 8% before the Series B
• I assume that my dilution at Series A will be 35%:
Shares at the M&A 8% / .35 = I need to have 23% before the Series A
Conclusion: If you have 23% at the initial round for $2M you’ll receive $12M in 5 years. Deal!!

13. Hope you enjoy it!
@BerkeleyExecEd
If you have any question do not hesitate to contact me: @RicardGarriga