Clients often ask for my assistance in working through numbers and rate of returns for private equity investors. Here is the basic concept. If you have a pre-money valuation of $2M and are raising $500k in a seed round, you are giving up 20% of the equity to the private equity investors.
Most angel investors will want to see 3 to 5 year cash flow projections. What they ultimately are checking for is: (1) an assessment of how reasonable you are estimating revenues and how accurately you have looked at expenses; (2) a risk assessment of the cash flows for the business model (i.e., how close to bottoming out do you get before you break even and grow); and (3) a determination of their expected return based on projected earnings.
Assuming no future equity rounds are planned which will dilute that ownership interest, the angel investor can determine their rate of return on the investment. For 5 years out, let’s assume EBITDA is projected at $10M and company value is projected to be 4X EBITDA. The 5 year return will be:
20% ownership X 4 X ($10M/500k) = 16X investment
The key here is that your cash flow projections are projections based on thought through assumptions. They are not guesses! Work through the numbers and be confident in them when presenting to investors.
500k/(2M+500k) = 20% ownership
Most angel investors will want to see 3 to 5 year cash flow projections. What they ultimately are checking for is: (1) an assessment of how reasonable you are estimating revenues and how accurately you have looked at expenses; (2) a risk assessment of the cash flows for the business model (i.e., how close to bottoming out do you get before you break even and grow); and (3) a determination of their expected return based on projected earnings.
Assuming no future equity rounds are planned which will dilute that ownership interest, the angel investor can determine their rate of return on the investment. For 5 years out, let’s assume EBITDA is projected at $10M and company value is projected to be 4X EBITDA. The 5 year return will be:
20% ownership X 4 X ($10M/500k) = 16X investment
The key here is that your cash flow projections are projections based on thought through assumptions. They are not guesses! Work through the numbers and be confident in them when presenting to investors.
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