EARLY stage equity decisions made easy

OK you’ve got a business. It’s small, it’s going and you think it could be big.

How do you value it?

You don’t. There is no “valuation”. It’s all just made up. No one is buying, no one is selling and therefore there is no price.

So how do you figure out what percentage to give someone who is helping you (either via money, time, or both)?

It’s actually an easy equation, and it has NOTHING to do with any of the numbers you think:

P < API / (API + 1)

API is the “Anticipated Percentage Increase” that you believe this PERSON’s INPUT (including everything you know he/she will do and all money invested—everything!) will have on your business. Be conservative but fair.

P is the percentage of your business you should give the person for his input.

So if Joe wants to invest $10,000 in your business and spend 20 hours per week making sales calls for you, you need to determine how much that will increase the value of your business.

Let’s say you think it’s 50%. So the API is .50. Let’s work it out.

P < .50 / (.50+1)
P < .50/1.50
P < 33.33%

So, in this example, giving Joe anything less than 33.33% is a profitable trade for you, because at the end of the day, you will own MORE than 66.66% of a business that is now worth 1.5x what it is now. That’s more than the 1.0 value you have now…..also known as a good trade.

If Joe would be happy and fully incented at 10%…that’s an even better trade!

Obviously, this is simplistic and not meant for negotiations in later stages of business where price/valuation is more determinable via multiple interested bidders.

But it will work for the very early stage decisions.

It has nothing to do with sales ratios, predictions or any other unknown nonsense. It has everything to do with understanding how much of an impact someone can have on what you’re doing, and compensating them (via aligned interests) in a manner that gives you an reasonable expectation of profit.

p.s. if you have no idea what value increase to expect from someone else’s involvement 1) figure it out or 2) quit wasting your time considering having that person on your team