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March 07, 2007 Do you know what your future holds?
Understanding your company's future capital requirements is crucial in determining shareholder value. Quist has done numerous 409A valuations for emerging companies that are in need of additional equity financing. When going into a valuation there are several questions you should ask yourself to better understand the future financial needs of your business.
When will additional financing be needed? How much cash should be raised? What significant milestones is my company looking to achieve in the short and long-term? Will we need additional cash to support these milestones and growth?
Most companies receive several rounds of equity financing before an exit is realized. Each additional round of financing is accounted for in the valuation, which ultimately reduces existing shareholder ownership and the value of the company's common shares through dilution. To determine the impact of additional funding to existing shareholders a pre-money and post-money valuation of the company is completed.
The pre-money valuation is simply the estimated value of the company as it stands prior to any investment. Determining the pre-money valuation of the company, combined with the amount of capital secured, determines the amount of equity ownership sold in exchange for capital. The resulting valuation after the investment is called "post-money" valuation. From this, the impact of the funding to existing shareholders is determined.
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