MAE 4610 Handout August 29 2011 - MAE 4610/ENGRG 4610/MAE...

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MAE 4610/ENGRG 4610/MAE 4152 August 29, 2011 Handout Outside financing – selling stock to investors to raise cash – is important for many startup businesses. First, the business should have a good business plan and should find some interested investors. The next step is negotiating a value on the business. While there are many methods and recipes to use to find a theoretical value on a business, in actual practice it all boils down to a negotiation between the investor and the CEO or founder of the business. The founder wants as high a value as possible, while the investor wants as low a value as possible. The agreed upon value for the business will then put a price on the business as a whole, and on each share of stock. Since the investor is buying a piece of the business, naturally they don’t want to spend too much for it. Principle I: At an instant in time, all shares of common stock in a corporation have the same value per share. One term used a lot is the pre-money valuation. It represents the value of the business before the investor pumps any cash into the business. At that time, the business will have a certain number of shares of stock outstanding. By dividing the pre-money valuation by the number of shares outstanding, we can also get a pre-money price per share. Example: Aaron Ackerman starts a corporation by himself on January 1, 2011. He pays $0.10 per share for 100,000 shares of common stock. Soon after, on April 4, 2011, Betty Becker is hired. She agrees to pay $0.35 per share for 100,000 shares of common stock. On June 15, 2011, investor Cathy Caldwell listens to Aaron and Betty give a business plan presentation, and she says that she believes the value of the company is $200,000 prior to any investment. What is the value of Aaron’s and Betty’s stock on June 15, 2011? Pre-money value
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This note was uploaded on 09/05/2011 for the course ORIE 4152 at Cornell University (Engineering School).

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MAE 4610 Handout August 29 2011 - MAE 4610/ENGRG 4610/MAE...

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