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Unformatted text preview: have to generate IRRs of 200% or better. That’s a very high return. Use an Investment Analysis to Show Investor Returns
Although NPV and IRR calculations may be enough, it’s generally better to use a complete investment
analysis table to set the basic expectations of investment amount, percent of company acquired, and
proposed return. The following table offers an example. PROPOSED INVESTOR RETURNS The Investment Analysis Table lays the groundwork for the investor. (Note: for display purposes
dollar values are displayed in thousands.) HURDLE: THE BOOK 22.10 ON BUSINESS PLANNING You can see here that the investment proposal is that an initial investment of $1 million at start-up
buys 55% of the company. That share will be worth $88 million in Year 5, which is a Net Present Value
of $54.6 million, and an Internal Rate of Return (IRR) of 145%
In the real world, all of these values are the subject of negotiation. Investors rarely, if ever, accept the
entrepreneurs’ assumptions for future sales, valuation, investment amount, or percent of ownership.
They do, however, expect the entrepreneurs seeking investment to calculate return on investment and
to show their assumptions clearly as they suggest possible returns.
The sample shown here is just one example. The world of investing and start-up businesses doesn’t
have a set format for presenting this type of information. What’s most important is to make sure that
the information is available to investors as part of the plan. The Investment Offering Table
Investors also want to know how you plan to distribute stock ownership and handle dilution. This is
especially important when a start-up needs multiple rounds of ﬁnancing, but even with a more simple
investment plan, the investors want to know what you plan to do with shares. How many shares of
stock are there, how many do the founders already own, how many are pledged to employees, and
how many will be offered to future investors? INVESTMENT OFFERING TABLE The...
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- Winter '09