Watson PMV Methodology : Discount Points, Errors, Provisional Valuations and Using Divisible Magic To Beg For Money

Profit margin, gross margin, cash flow positive/negative, gross revenue, net revenue, net profit/loss…all of these are buzzwords that perk the ears of the dumbest, most gullible “entrepreneurs”. Real entrepreneurs never place the fate of their startups in angel investors/venture capitalists–entrepreneurs are the “say-so” when it comes to determining the “value” (snicker) of their ventures, particularly, the illusive pre-money valuation.

Your first clue to being duped is the average, mundane entrepreneur’s willful ignorance and blatant misunderstanding of the term “pre-money“. Once a startup has begun generating revenue, it is no longer in the suspension of being in a “pre-money” status–but all of you reading this are already cognizant of that, however, many entrepreneurs are left in the dark as to how it actually changes them and their tag-along ventures.

You may ask,

“Desmond, why are you spending so much time devoted in determining the PMV of your startup when other entrepreneurs are allowing the rulers of law (investors) to squeeze their miniscule ding-a-lings to pieces, take near-complete control of their startups and give them a pittance of ‘ownership’ left after they’ve sharked their ventures into shreds, maaan?”

The reason why I occupy myself with this daunting task of determining the PMV for HL™ is because of clueless punks like yourselves are bereft of the requisite mathematical fortitude it takes to actually hone the skills necessary to stay at the helm of your own business ventures. Instead of spending money on t-shirts so that every member of the HL™ Team freely advertises their dedication to this “something” that we call a startup and simultaneously adorn the costume of natural-born absent-mindedness as to the “value” of this “something” that we call a startup, I see myself as the ultimate decision-maker. Yet, the lemmings let their natural predator dictate their next and every subsequent step they take–until it’s too late and they end up devoured. This ain’t conjecture I subscribe to, and here’s a quote from a three-year old article that gives the viewpoint that my labyrinthine mind takes a stance against:

“Here’s an example: Say you want to raise $1 million in financing. If you place a PMV of $1 million on your startup, then investors would receive 50 percent ownership and the company would forgo 50 percent. If the PMV was instead $3 million but you still only needed to raise $1 million, investors would only receive 25 percent ownership in the company and existing shareholders would give up only 25 percent.”

Source: From an article in Entrepreneur by Alan Lobock

Entrepreneurs whom have been whipsawed into believing the greedy utterances of angel investors, venture capitalists, individual investors and lottery winners turned self-appointed “seekers of the next big thing” actually feel obligated to give someone who hasn’t the slightest clue as to the actual value of this “something” that we call a startup anywhere between 15%-20% of an equity stake in their venture because they’ve been brainwashed into thinking that it’s the “norm”; it’s what everyone else does. Someone with this mindset is a clear example of not understanding the definition of what it means to be an entrepreneur: having thought patterns totally opposite of everyone else. With that said, the mathematical approach to understanding how much equity you are supposed to give up in exchange for some stranger’s cash infusion is something that only the entrepreneur can orchestrate. This is not an approach for negotiation; this is an approach that substantiates your firmness (nh @ “your firmness”) about your position with your business venture.

Any business venture that operates in the 4th-level economy (technology) that only has a PMV of $1,000,000 USD isn’t a real business (at least, not for long).

Notice how in the quote up above there’s no mention of the total number of outstanding shares nor the number of shares issued. In my mathematical approach in determining the pre-money valuation it is required that the number of shares issued and the total number of outstanding shares are incorporated in the equation–as well as the number of shares of authorized. Once you have determined what your number of shares authorized are, this is when you factor-in the ideal maximum equity stake percentage you would give to an investor. Too many of you are of the belief that you are to never reveal the number of shares authorized. You don’t have to until the day that you find yourself sitting across the table from some stranger who brought himself/herself to the conclusion that they are willing to invest in your startup. But, you do have to factor the number of shares authorized in the equation to determine not only the pre-money valuation of your business venture but also the “right” range of equity stake to give to an opportune investor.

The majority of you morons feel that it’s your duty to be loyal to whatever some melanin-deficient imbecile says on his “blog” (Mark Suster, Brad Feld, etc.). For instance:

“In a venture capital investment, the terminology and mathematics can seem confusing at first, particularly given that the investors are able to calculate the relevant numbers in their heads. The concepts are actually not complicated, and with a few simple algebraic tips you will be able to do the math in your head as well, leading to more effective negotiation.”

Source: Venture Capital Deal Algebra by Brad Feld

However, one thing that you’ll notice is the minimal use of numbers (with the exception of the latter part, which, by the way, is comical) in the equations; instead, words are used to substitute for Mr. Feld’s lack in understanding mathematical application. I will never give up more than 10-11% in an equity stake in HL™ to any demon investor/venture garbageolist/private parts-holding homo…whatever. To me, you’re nothing more than a human ATM [machine]. Other than that, you’re virtually worthless. So, with that said, here’s an example of the Watson PMV Methodology:

Startup A needs an investment of $3,500,000 USD

20,000,000 shares authorized

20,000,000 * (the ideal equity stake maximum of 1.503%)

= 300,600 shares issued to an investor

Amount of money raised ($3,500,000) divided by the 300,600 shares issued to an investor

Gives you a price per share value of $11.64

At this point, you have to multiply the price per share value by the investment amount.

PPS (I)

11.64 (3,500,000) = 40,740,000

What I’m getting ready to show you is the typical means by which a pre-money valuation is determined by the so-called “rulers of law”.

The following is the avoidable error that most entrepreneurs allow themselves to be duped into:

Take the PPS of $11.64 and multiply it by $3,500,000 to determine the post-money valuation

= $40,740,000 (Post-Money Valuation) – $3,500,000 (Investment)

= $37,240,000 (Pre-Money Valuation)

The reason why I call the aforementioned sub-sample an error is because for most term sheet deals, this is where it all ends for most entrepreneurs; they choose to not go further with the math in order to comprehend a better understanding of the nature in determining the absolute value of their business venture. I call this “the cut-off“. With that said, it ain’t hard to tell that the purpose of doing the math isn’t solely for the sake of determining the absolute value of your startup, but in finding both the ideal maximum and ideal minimum equity stake that you should give to an investor [with the minimum rendering the higher PMV as opposed to the maximum rendering the lower PMV]. Of course, in the latter methods, you’ll see a difference, but for starters, remember this simple process:

Ideal Maximum = Lower PMV 

Ideal Minimum = Higher PMV

Seriously, all of you know-it-all entrepreneurs are aware that a 7% equity stake in your startup is definitively on the high-end side of the spectrum, right? You’re also conscious of the fact that giving away 7%+ in an equity stake of your startup is for someone (or group of “someones” (plural)) who is willing to bankroll the entire cost for your startup to “do its thing”, right? Especially when you’re not even aware of how much value a small percentage in equity holds for your business venture. With that said, let’s resume with our initial example.

$11.64 (PPS) multiplied by ($3,500,000)

= $40,740,000

$40,740,000 divided by the number of shares reserved for an Option Pool (500,000 shares)

Take note of what I did there. Utilizing my methodology, you divide the presumable “post-money valuation” by the number of shares reserved for the Option Pool, giving you

Provisional “Post-Money Valuation” / Option Pool Shares

$40,740,000 / 500,000

Pre-Discount Point Share Price = $81.48

I must stress that at this point–this is when you apply a discount (a subtraction) to the Share Price–and it’s imperative that you do not exclude the importance of incorporating use of the decimal points as well. Do not misconstrue Share Price with Price Per Share. However, you have to have the number of Total Outstanding Shares, dividing the number of shares reserved for the Option Pool by the Total Outstanding Shares. But first, the discount:

For this example, we say that the Total Outstanding Shares are 14,355,446

500,000 / 14,355,446 = 0.034829987

0.034829987 * 100 = 3.48

Share Price – Discount Point

$81.48 – $3.48 = $78.00

Share Price post-Discount Point = $78.00

Now, we bring in the number of shares reserved for the Option Pool:

Share Price post-Discount Point * Option Pool

$78.00 * 500,000 = $39,000,000 (value for Option Pool)

After you’ve subtracted the Discount Point from the initial Share Price, you’ll have the post-Discount Point Share Price that you’ll multiply by the number of shares reserved for the Option Pool, which yields the value for the Option Pool at $39,000,000 in the example provided. Afterwards, you’re now ready to determine the post-money valuation.

Share Price post-Discount Point * Total Outstanding Shares = Post-Money Valuation

$78.00 * 14,355,446 = $1,119,724,788

 Post-Money Valuation – Investment Amount = Pre-Money Valuation

$1,119,724,788 – $3,500,000 = Pre-Money Valuation of $1,116,224,788

There you have it. Now, it should be apparent to all of you Arheliean subscribers and random blog perusing birds how important it is to see exactly how much value can be extracted from such “small percentages”. Needless to say, 1.503% isn’t exactly a derivative that can be attributed to “small percentages” since the percentage point yields a pre-money valuation of over $1B+, and, on top of that, Startup A was looking to raise just $3.5M. Of course, $3.5M is just one variable. There are other variables to consider. They include the number of shares reserved for the Option Pool; the number of shares authorized; and the most obvious is the amount of cash you’re looking to raise. As stated before, the ideal maximum is the equity stake that you set-in-mind to initially extend to an investor, which, in the example above, is 1.503%. So, what is the ideal minimum, since that is what would yield an even higher post-money/pre-money valuation?

Take the investment amount ($3,500,000), divide it by the Post-Money Valuation

$3,500,000 / $1,119,724,788 = 0.003125768

0.003125768 * 100 = .313%

So, we find that the ideal minimum equity stake mathematically mandated by the Watson PMV Methodology is .313%, giving us a ES Range of .313% – 1.503%. For me, the aforementioned methodology is an imperative means by which I would negotiate, giving me a range of equity to work with and not have to “throw in the towel early” and go with the flow and surrender an incredibly large percentage of equity [and control] to someone [or, a group of “someones”] who does not harbor the characteristics of an entity who would have the best interest of HL™ in mind and heart. This is why I only long (nh) for the interest of investors whom liken themselves to being nothing more than a “convenient ATM” for the startup. I’m not looking for advice unless said “advice” accompanies a base network of connections to other investors whom also operate under the premise of being utilized as nothing more than just a “convenient ATM“. Also, you need to show me the obligatory mathematical equation that substantiates a 15%-20% equity stake, at the “seed” (snicker) level, as a standardized metric by which entrepreneurs are to oblige and not pose with an open challenge to the status quo. You can’t, especially to a true-to-the-game entrepreneur like myself who is bound to the noun’s definition as “an individual whose thought patterns are totally opposite of everyone else’s”. The way I determine the pre-money/post-money valuation for my startup is totally opposite of everyone else’s; which, in turn, makes me better than them because my diametrically-opposed thought patterns both beneficially validates and drives the point home. However, with the “standardized” metric of just giving away nearly 1/4th of your startup’s equity for the sake of doing so seems so deeply ingrained in the minds of would-be entrepreneurs that any attempt to redirect their motivation into a direction that will lead them towards gainful prosperity comes off as a lost cause. And when I reference the “seed” (snicker) level, I’m speaking of a startup’s infancy–it’s the founder’s responsibility to grow the startup from conception (i.e., it’s embryonic stage) to gestation. To be given “seed capital” is practically the ritualistic act of birthing your startup into the “real world”, however, to not have enough “seed capital” is a good way for the “rulers of law” (investors) to set you up to be devoured–years down the line. In other words, inadequate funding leads a business venture towards its definitive (not “beautiful”) death. This “definitive death” emerges from the mucky depths of deceptive waters in the form of an alligator known as a forced merger and acquisition, or, even worse, a crocodile we call a hostile takeover. This is what’s taking place now with some of your more noticeable startups falling by the wayside on part of “lacking the funds” [coupled with “lacking the ability to generate any revenue”] to stay afloat–and some may inquire about the viability of HL™.

Hexagon Lavish® has yet to be birthed.

Fathering the style and character of your startup, firm, company, establishment or what have you is the main attractive quality of the founder and the core team led by that founder. It’s been quite a while since your more substantive entrepreneurs have cemented their firmness (nh @ “their firmness“) regarding how they carve-out the pathways to “success” (snicker) for their ventures. With HL™, you’re looking at a startup going through an extended period of suspension; it has direction, it is equipped with character and style–and that’s good because it translates into fragments of the startup’s goodwill–however, the startup lacks the funding to go from Point A to Point B. That gives fuel for potential competitors–and I don’t mind that since our “prototypical efforts” will soon gain mass appeal–and that stomps out all complements bestowed upon the normative “major players” in the game, creating a stumbling block for them as we amass a more competitive threat status as an entity that investors gravitate towards en masse. So, the question that remains is: how exactly do you get the attention of the kind of investors that you wish to do business with?

Some [angel investors and venture capitalists, respectively] say that you should be “so strong” in your presentation (i.e., your daily activity) that you’re gaining a nationwide-stretched notoriety about your startup’s presence that you end up “fighting off” some of the attention that you’re getting. In other words, work hard, put out your product and let the [general] public become aware of what you’re doing. Once investors catch wind of all of this “attention” that you’re getting, then they come-a-knockin’ That would make sense to the gullible entrepreneur, but, to the materialist, the approach isn’t quite the “right” option.

I choose to use numbers instead. Let’s look at another example of the Watson Mathematical PMV Methodology.

19,500,000 shares authorized

So, in this example, we start off with 19,500,000 shares authorized and we’re going to “tie” this with an ideal maximum equity stake of 8.325%, which yields 1,623,375 shares issued to an investor or group of individual investors.

19,500,000 shares authorized * (8.325%)

= 1,623,375 shares issued

This time around, I will not include any sort of “discount” to the Share Price in this exampled equation. The amount that I’m trying to raise in this equation is $8,500,000, therefore, to determine the price per share (PPS):

I (Investment) / Number of Shares Issued = Price Per Share (PPS)

8,500,000 / 1,623,375 = a price per share of $5.24

At this point, we want to determine the “value” of the Option Pool. According to some convoluted “industry standard”, the way you would do it would be the following [error]:

Say, that the total number of share for the Option Pool is 500,000 shares

PPS * (500,000) = $2,620,000

That mistake is so typical of Silly-Ass Valley Silicon Valley it’s not even funny–anymore. It’s imperative that you determine the Share Price, and just to show you the benefit of versatility [in mathematics], I’ll show you how to determine the Share Price differently from the previous example.

I (Investment) / Number of Shares Reserved for Option Pool

$8,500,000 / 500,000

= 17 * (PPS)

= 17 * ($5.24)

= $89.08 (Share Price)

See what I did there, mawfuckas? Now, moving onto calculating the actual “value” (snicker) of the Option Pool:

Take the Share Price and multiply it by the number of shares reserved for the Option Pool

$89.08 (Share Price) * 500,000 (Option Pool)

“Value” of Option Pool Shares = $44,540,000

That’s more than a measly $2,620,000, right? So, how about that Post-Money Valuation?

Take the Share Price (not Price Per Share) and multiply it by the Total Number of Outstanding Shares

$89.08 * (Total Outstanding Shares)

In the case for this example, the Total Number of Outstanding Shares is 15,678,221

$89.08 * (15,678,221)

Post-Money Valuation = $1,252,005,681.68 – I (Investment)

Pre-Money Valuation = $1,243,505,681.68

So, what about the ES (Equity Stake) Range?

Take the Investment amount and divide it by the Post-Money Valuation

8,500,00 / 1,252,005,681.68

= 0.00678910 * 100

= .679% (Low-End) – 8.325% (High-End)

Principled by my methodology, the ES Range is the entrepreneur’s main characterial defense in his/her structural “argument” once the negotiation between the entrepreneur and the know-it-all masquerading as an “angel investor” commences. Understand this one thing about the Watson PMV Methodology: the goal isn’t to find out what the pre-money valuation and the post-money valuation are–the main objective of the Watson PMV Methodology is to find both the ideal minimum and the ideal maximum of the equity stake given to an investor. The higher the maximum, the more in capital investment you mandatorily require of the investor, and this is something that investors need to realize. Eschewing this “European reality” that I, as the entrepreneur, am to fork over 20% in equity to them is an activity that needs to be put into practice only to be adopted as the “new reality” for the entrepreneur. I say “European reality” because the Western world-ethnocentric approach does not reflect any true entrepreneur’s real world experience. So, to eradicate this “European reality”, for myself, I’ve had to resort to developing and self-mandating my very own [mathematical] methodology that intentionally exploits my reasoning to not fork over too much of what I outrightly own. I birthed Hexagon Lavish®; I assembled this current “team” that has developed a working prototype. Tell me where exactly in that previous sentence do any of you reading this see, “[insert name of investor] swooped down from the gates of heaven, came up with the business idea/business model, gathered together a team of scientists and gave us the name of the company“. Do you?

Answer: No, you don’t.

Burn this deep into your minds: an investor/VC is nothing more than a convenient ATM. That’s all they are; nothing more, nothing less. Of course they’ll attempt to justify their [depending on the flailing bent of the entrepreneur] presence as being “beneficial to the maturing growth” of the startup, but, isn’t that on behalf of the direction of the founder? The design of a company’s “success” is directly attributed to the puzzle of human will, it’s a team effort; an investor is just a piece of that puzzle (or his/her money, rather). Others think differently. They’re of the worldview that an investor is an integral investment, meaning more than just money. In my opinion, those that cling to said “worldview” are in need of a financial chaperone; they can’t just take the investment and “run with it“, and by “run with it“, I’m implying that you have some would-be entrepreneurs that desire to have someone hold their hand and walk with them across the street [guide them along until they’ve achieved “success”]. This isn’t the signature of a bona fide investor. Since when did a true-to-the-game entrepreneur need step-by-step guidance from an investor? That’s what a mentor is for–and no–an investor can never be the mentor for the founder. An investor is going to look out for his/her best interest–the investment that they made. If it’s their self-interest in assuring that their investment rakes a 10x-30x ROI in addition to getting a board seat, then that’s where their mind is focused. If you haven’t figured it out by now, that’s the reason why investors/VCs long for 20%-25% initial equity stake in your startup; to make up for the prior bad investments they made in other ventures. 

You want 20%-25% of my company, right off the rip? You serious?

 That just won’t happen, however, there’s another method to the madness when it comes to using the Watson PMV Methodology. Say you have 21, 750,000 shares and some investor gives you $500,000 and you, in turn, give up 5.083% equity stake in your startup:

21,750,000 shares authorized * 5.083% equity stake

= 1,105,552.50 shares issued

$500,000 / 1,105,552.50

= 0.45 (High-Divisible)

Now, what did I just do there? I introduced 0.45 as a “high” divisible because later on in the equation, you’ll see the “high” divisible as advantageous in calculating the pre-money valuation. Most would assume that by “divisible”, one would take a number like 12 and consider 3 to be a divisible of 12–which is true–however, a divisible [in decimal form] can be used for so much more in life, such as the following:

21,750,000 shares authorized * 5.083% equity stake

= 1,105,552.50 shares issued

$500,000 / 1,105,552.50

= 0.45 (High-Divisible)

$500,000 (100/5.083) = $9,836,710.60

$9,836,710.60 / $500,000 = Price Per Share of $19.67

$500,000 / $9,836,710.60

= 0.051 (Conditional Divisible/Multiple)

Price Per Share * (Number of Shares Issued)

$19.67 * 1,105,552.50 = 21,845,717.40

Number of Shares Reserved for Option Pool / 21,845,717.40

= 0.07 (Constant Divisible)

Take the Constant Divisible of 0.07, multiply it by the “divisible” of 0.051

= 0.0037

0.0037 * 100 = 0.37

Price Per Share of $19.67, divide it by 0.37 = 53.16

53.16 divided by the “high” divisible of 0.45 gives you the Share Price

53.16 / 0.45 = $118.13

Share Price multiplied by the total number of outstanding shares

$118.13 * 1,105,552.50 = $130,598,916.83 (Post-Money Valuation)

$130,598,916.83 – Investment ($500,000)

= $130,098,916.83 (Pre-Money Valuation)

You have to “measure” the varying angles of the methodology to see exactly how much “play room” you have with the divisible and how advantageous the use of decimals are over the utilization of percentages you see in your more “standardized” formulae used in some of the external sources I have already linked to earlier in this blog post. I’m referring to that “2+2=4” way of thinking–which is a “shortcut” in determining your startup’s “value”–however, as you can witness in the above example, there are no shortcuts when it comes to estimating your venture’s “value”. In the example up above, you see that you have what I like to call the “constant divisible” (0.07), which is a variable [in spite of being labeled as “constant”] that doesn’t change unless you issue more shares (authorized). The one divisible that really benefits the entrepreneur in determining the value of their venture is the conditional divisible that dually functions as a multiple as well, which in this case, is the decimal 0.051. Decimals have always been more of an advantage than percentages. In fact, in my PMV methodology, the only percentage you have is the equity stake given to an investor party; everything else is “decimaled“. 0.051 can be used in both a multiplication form and as a divisible, increasing the “valuation”. The “high” divisible is fronted by the noun [“high”] because its “advantage” is strictly dependent upon how much capital your startup seeks. Lower amounts of capital would seem to be the preference but its also noted on how many shares are authorized. Using the same amount of capital in the previous example, let’s have another go at it:

21,750,000 shares authorized * 5.083% equity stake

= 1,105,552.50 shares issued

$500,000 (Investment) divided by the number of shares issued (1,105,552.50)

$500,000 / 1,105,552.50

= 0.45 (High-Divisible)

 Investment Amount * (100/5.083)

500,000 * (100/5.083) = 9,836,710.60 (“First” Provisional “Valuation”)

9,836,710.60 / 500,000 = Price Per Share

Price Per Share = $19.67

To determine the Conditional Divisible/Multiple,

Investment Amount / “First” Provisional “Valuation”

$500,000 / $9,836,710.60 = 0.051 (Conditional Divisible/Multiple)

Price Per Share multiplied by the number of shares issued

$19.67 * 1,105,552.50 = $21,845,717.40 (“Second” Provisional “Valuation”)

Number of Shares Reserved for Option Pool / “Second” Provisional “Valuation”

1,500,000 / 21,845,717.40 = 0.07 (Constant Divisible)

Now, here comes the fun part:

Static Divisible / Price Per Share

0.07 / 19.67 = 0.004

0.004 * 0.051 (as a multiple) = 0.000204

High-Divisible * 0.000204

0.45 * 0.000204 = 0.0000918

0.051 (as an actual divisible) divided by 0.0000918 = Share Price

0.051 / 0.0000918 = $555.56

Share Price * Total Number of Outstanding Shares

$555.56 * (we’ll use the shares issued) 1,105,552.50

= $614, 200,746.90 (Post-Money Valuation)

Post-Money Valuation – Investment Amount

$614,200,746.90 – $500,000

= $613,700,746.90 (Pre-Money Valuation)

ES Range– 0.081% – 5.083%

So, the pre-money “valuation” [as determined in the “second variation” of my PMV methodology] turns out to be much more than the $130,098,916.83 calculated in the “first” variation by mere manipulation of 0.051, conditioned as a multiple firstly and then secondly as a divisible. Of course, in this example, I multiplied the Share Price by the number of shares issued [to the investor], but the total outstanding shares is much more, so essentially you’re looking at a pre-money “valuation” well into the billions. Also, I need for you all to realize that I’m showing you how I determine a startup’s “valuation”. There’s none of this “…oh, as a well-seasoned investor, I can see you guys with a value of $3,000,000, so I’ll invest $1,000,000 in your venture, giving you a post-money valuation of $4,000,000“. Get out of here with that misinterpreted “3+1” nonsense. If you’re steadfast on abiding by the socioeconomic “standards” established by the “rulers of law”, then you’re wasting your time reading this post, but, if you want to implore yourself on understanding how it’s not so difficult to comprehend other ways and means to determine actual value, then let us continue to do so.

In this example, we’ll use the same exact number of shares authorized (21,750,000), only this time, we’re raising $5,000,000 (ten times the $500,000 in the previous example).

21,750,000 shares authorized * 5.083% equity stake

= 1,105,552.50 shares issued

Investment Amount divided by the number of shares issued

$5,000,000 / 1,105,552.50

= 4.52 (High-Divisible)

Notice that, unlike in the previous example, the amount of money to be raised ($5,000,000) “overlaps” the number of shares issued (1,105,552.50), giving us a “high” divisible of 4.52, much higher than the “high” divisible of 0.45 in the previous example despite both examples having the exact same number of shares authorized and the exact same number of shares issued.

 

Investment Amount multiplied by 100 divided by the equity stake

5,000,000 (100/5.083)

= 98,367,106.04 (“First” Provisional “Valuation”)

98,367,106.04 / 5,000,000 = Price Per Share

98,367,106.04 / 5,000,000 = $19.67

In spite of raising ten times more than the $500,000 in the second variation of the Watson PMV Methodology, dividing the “first pre-determined valuation” by the investment amount still gives us the same exact price per share of $19.67, as it was in the second variation of this methodology.

 

To determine the Conditional Divisible/Multiple,

Investment Amount / “First” Provisional “Valuation”

5,000,000 / 98,367,106.04

= 0.05 (Conditional Divisible/Multiple)

Conditional” just makes the math that much more relative inasmuch as it is used for both division and multiplication specifically in the latter part of the equation.

Price Per Share multiplied by the Investment Amount = “Second” Provisional “Valuation”

$19.67 * 5,000,000 = 98,350,000

Number of Shares Reserved for Option Pool / “Second” Provisional “Valuation”

= 0.02 (Constant Multiple)

Conditional Multiple * Constant Multiple = 0.001

0.05 * 0.02 = 0.001

0.001 / High-Divisible

0.001 / 4.52 = 0.00022

0.00022 / Price Per Share

0.00022 / $19.67 = 0.000011

0.000011 * (100) = 0.0011

0.05 / 0.0011 = 45.46

45.46 + Price Per Share = $65.13

$65.13 * Total Outstanding Number of Shares = Post-Money “Valuation”

$65.13 * 15,500,500 = $1,009,547,565

$1,009,547,565 – Investment Amount = Pre-Money “Valuation”

$1,009,547,565 – $5,000,000 = $1,004,547,565

Equity Stake Range– .495% – 5.083%

Now, you can see the advantage of “decimal division”. Of course, Silly-Ass Valley Silicon Valley-“standardized” fuckers will scoff at the Share Price with sheer disbelief and insurmountable skepticism because they live in a “dream world” where the entrepreneur should be broke and selling their ass on street corners in the Tenderloin or something while the “rulers of law” reap the benefits of someone else’s grunt work. And what’s worse is that some of you so-called “entrepreneurs” are too scared to contest the “standards” of some venture capitalist who failed eighth grade math. But, you want to give away a whole lot of equity on a “just because” basis? See, this is where the ES (Equity Stake) Range comes into play because it serves as a means of assuring that you’re not unintentionally giving away too much of your company. The ES Range establishes a “floor” and a “ceiling” for the amount of equity that you intend to give to an investor. I said it before and I’ll re-iterate: the purpose of this methodology isn’t just to determine what the pre-money “valuation” of your startup is, but it’s also to find the ideal maximum and the ideal minimum; the “floor” and the “ceiling”; setting boundaries for both you and the investor. You determine the ES Range by dividing the Investment Amount by the Post-Money Valuation. This gives you the negotiation (i.e., ES Range) range.

One characteristic of an investor that you want to look for is their ability to think long-term and a willingness to negotiate. Most would think that, of course, every investor is open to negotiation. Oh, you would think, huh? As an entrepreneur, you have to a goal to accomplish, and that’s to acquire the capital necessary to operate and to develop a product, however, you shouldn’t let fundraising be the sole-driving force that corners you off into a dilemma: accept the investor’s “wants” and take the money, or don’t take the money and lose the talent that tied themselves to you and lose the market opportunity. Sure, venture capitalists don’t want to be seen as just “convenient ATMs”; but that’s what I, as the entrepreneur, want [in an investor]. I’m for certain that investors believe that they contribute value to the startups they make an investment in, but, they don’t. An investor’s greatest asset or, for a lack of better terms, contribution, to a startup, is the experience they have behind them. But, experience, in relation to backing a startup comparable to Hexagon Lavish®, is difficult to define in this context [or any context, rather] since you’d be hard-pressed to find any other startup that’s doing what we’re in the process of accomplishing–and that’s introducing actual new technology to consumer markets. It would be easy for an investor to approach me, talking shit, if HL™ promoted itself as the “next [insert name of current ‘unicorn’ here]”, and the reason why is because they’ll claim that their “experience” was nurtured during their involvement in the growth of [insert name of current “unicorn” here] and how said “experience” will benefit you, but it can’t since your venture is nowhere near similar in nature to whatever venture that investor claims he or she helped out along the way. Do know that investors will come with their “cup of magic beans”; they’re “Jack” and your startup is the beanstalk that they say they can grow to incredible heights [on part of their “experience“].

Your question for them is: “..how do you have experience in backing a startup that doesn’t even have an equivalent currently on the market?

Folks, I don’t know about you, but if I were in the negotiation phase with an investor, I have no issue with letting them know that I do not harbor neither the patience nor any tolerance for argumentum ad populum fallacies accompanied by innocuous, nondescript terms. Experience benefits you only when it’s on your side. Someone’s experience is meaningless if it’s not meant to be in the defense of you, your business (i.e., an individual seeking employment), etc.. An investor that holds the prospect of making an investment in your startup with a sound mind is the most desirable–and also the most rare of all investors. By “sound mind”, I’m implying an investor who’s willing to engage with the entrepreneur on the entrepreneur’s terms, and it’s difficult to fall on common grounds on those extremes with investors these days but the reward is good camaraderie and a “business relationship” that is not based on fallacies and deception. An investor who wants control is not someone you’d ideally long to do business with–why should you? Why would you just throw-in the towel and concede your position as being at the helm of your venture–something that you spent quality time building from the ground-up–to someone who sees you as “lacking this quality, lacking that quality” and doesn’t really have a positive outlook on the company overall? To a thorough entrepreneur, someone else’s ulterior motives always surface. For instance, the term sheet. Investors are not obligated to “honor” any of the clauses on the term sheet; they’re only obligated to abide the contractual clauses of the legal documents that accompany the term sheet. How funny would you, as a thorough entrepreneur, look, to an investor and in front of your very own team that you worked hard to put together, if you, under the spell of self-endorsed willful ignorance, sign legal documents in which the investor “inserts himself“? And, as salt slapped on an open wound, you gave homie 25% of your company. 

As I’ve said before, 7% is on the high-end of the equity spectrum, but let me exemplify this in another example using a different strategy in the Watson PMV Methodology:

You are authorizing 125,000,000 shares in exchange of 6.002% equity stake that yields 7,502,500 shares to investors.

125,000,000 Total Shares Authorized * 6.002% Equity Stake

= 7,502,500 Shares Issued

$40,000,000 Investment Amount * (100/6.002)

= 666,444,518.50 First “Provisional” Valuation

Price Per Share = $16.66

Investment Amount divided by the First “Provisional” Valuation to calculate the Conditional Divisible/Multiple

$40,000,000 / 666,444,518.50

= 0.06 (Conditional Divisible/Conditional Multiple)

Price Per Share multiplied by number of shares issued to investors

$16.66 * (7,502,500) = 124,991,650 Second “Provisional” Valuation

Number of Shares Reserved for Option Pool divided by Second “Provisional” Valuation

18,750,000 / 124,991,650 = 0.15 (Constant Multiple)

0.15 * 0.06 (Conditional Multiple) = 0.009

0.009 / 5.33 (“High” Divisible)

= 0.002

0.002 * $16.66 (Price Per Share)

= 0.03332

At this point, I’ll introduce another method, and that’s taking 100 and dividing it by the equity stake. Doing so, will give you the decimal point that’s exactly the same as the Price Per Share [which, in this example, is 16.66].

100 / 6.002 = 16.66

Look at it this way: how times does 6 “go into” 100?

Answer: 16 times.

Get it? Let’s continue…

100 / 6.002 = 16.66

16.66 * 0.03332 = 0.56

0.56 / 0.06 (Conditional Divisible)

= 9.33

Adding 9.33 to the Price Per Share = Share Price

9.33 + 16.66 = $25.99

Share Price * Total Outstanding Shares = Post-Money Valuation

$25.99 * 102,502,500 Total Outstanding Shares

= $2,664,039,975 Post-Money Valuation

$2,664,039,975 – $40,000,000 Investment Amount

= $2,624,039,975 Pre-Money Valuation

Here’s yet another method….

125,000,000 Total Shares Authorized * 5% Equity Stake

= 6,250,000 Shares Issued to Investors

Investment Amount divided by number of shares issued to investors

$40,000,000 / 6,250,000

= 6.40 (“High” Divisible)

$40,000,000 * (100/5)

= 800,000,000 First “Provisional” Valuation

First “Provisional” Valuation divided by Investment Amount = Price Per Share

800,000,000 / 40,000,000 = $20.00 (Price Per Share)

Investment Amount divided by the First “Provisional” Valuation

= Conditional Divisible/Conditional Multiple

$40,000,000 / 800,000,000 = 0.05 (Conditional Divisible/Conditional Multiple)

Price Per Share * Number of Shares Issued to Investors

$20.00 * 6,250,000 = 125,000,000 (Second “Provisional” Valuation)

Number of Shares Reserved for Option Pool divided by the Second “Provisional” Valuation

= Constant Divisible

18,750,000 / 125,000,000 = 0.15 (Constant Divisible)

Constant Divisible * Conditional Multiple

0.15 * 0.05 = 0.0075

0.0075 divided by the “High” Divisible (6.40)

= 0.0012

0.0012 * $20.00 (Price Per Share) = 0.024

0.024 * 100 = 2.40

2.40 divided by the equity stake of 5 (do not apply the “%”)

2.40 / 5 = 0.48

0.48 divided by the Conditional Divisible of 0.05

0.48 / 0.05 = 9.60

9.60 + Price Per Share ($20.00)

9.60 + 20.00 = $29.60 (Share Price)

Share Price * Total Outstanding Shares

$29.60 * 101,250,000 = $2,997,000,000 (Post-Money Valuation)

$2,997,000,000 – Investment Amount

$2,997,000,000 – $40,000,000 = $2,957,000,000 (Pre-Money Valuation)

Quite a few methods to work with–and it’s for your benefit to explore and adapt to whichever method or methods (plural) work in your favor and give you some ammo in negotiating with greedy, Borg-like locusts masquerading as investors. Or, you’ll luck-up and actually cross paths with investors de facto.

In reference to the example up above, you’ll notice that I multiplied 0.024 by 100. Now, why did I? Note that most investors will fight tooth-and-nail to grab at a 20% equity stake just so they can have dibs on a board seat, so, on the assumption that you’ll have 5 board members, you know that 5 “goes into” 100 twenty times, therefore, an investor will be given 20%, but like I’ve said several times already, 7% is on the high-end of the equity spectrum. By default (meaning, on a non-negotiated standpoint), an investor would be given a 14% equity stake (since 7 “goes into” 100 fourteen times) in your startup, so with me wanting to give an investor only 5%, you’d think I would need 20 members on the board. How many startups you know have that many members on a board (nh @ “that many members on a board“)?

0.024 multiplied by 100 gives you 2.40, which you divide by the equity stake of 5 to get 0.48. I would never look at 5 and say: “…man, 5 represents each member of a five-person board“. Doing so, would be a poor attempt at  rationalizing giving some one investor 25%. You never yield that much power and decision-making to one person nor even a group of persons, regardless of how much they promise to give to you [as far as capital goes]. You only pursue the capital that you need.

Then again, I have to remind myself of the large majority of those reading this whom profess to be “entrepreneurs” themselves because the whole lot of them have chosen to fall under the looming spell of some these peckerwood, Silly Ass Valley Silicon Valley-residing, four-elements enthusiasts who masquerade as “investors” push this filth guised as “advice” into the varying combing droves of the freshly absent-minded–easily swayed by the faux-swoons from the typical cardigan-sweater-and-church-shoes stylistic lies and presumptions rained down from the heavenly clouds on which their idolized rulers of law stand. It would’ve been better off for them had they kept to their former hobby of Dungeons and Dragons. You have to be cut from a different cloth rather than consider yourself a part of the same fabric. If not, you’ll render the exact same sensation to an investor as every other entrepreneur has, leaving the investor unimpressed and quite possibly even draw up some bad, horrendous memory. One way to do this would be to prove how you value your very own venture instead of just sitting back and letting he or she do the “hard” work. If not, you’ll find yourself adapting to their assumptions that they borrowed from Dr. Funtyme’s Educational Toy Emporium, accompanied by a jerky, palsy-rhythm, rendering them perpetually learning-disabled. 

With that said, it’s imperative that you take the educational approach to understanding your own fixture about your startup and not let some investor come in and lay down the definition–and what do I mean by “educational”? Well, for those of you whom have pursued, or, are still in pursuit of their post-secondary education, a lot depends on the school itself. Take the computer science major, as an example. In one school, computer science is a part of the electrical engineering department, therefore, it will have a more practical aspect; in another aspect, computer science could have a more laser-precise focus on the business aspect. In a good school, there are no formal classes, but you just might have a professor who’s making an attempt to start his own company and just having to hear from him on how obtain venture capital funding along with the management headaches is educational. One thing that you will not learn in school is how much of life is all about begging for money. But at least, with this blog post, I have exemplified a well-structured manner on how to “beg” [for money].

I’ll conclude on this one last note: in these trying times where capital is heading westward [meaning, from the U.S. towards Asia], venture garbageolists are being “extremely careful” with their money. What that means, is that 90% of the money [that’s left] will most likely end up in the hands of either a Trump supporter who frequents Klan-owned diners; an overly-privileged, knuckle-headed fanboy of Elon the Muskrat who won a settlement check after his bare escape from an apparently avoidable wreck due to his Tesla’s malfunctioning “Autopilot”; or some incurious, effeminate white kid from Mountain View, California with a habit-formed addiction to generic Vicodin.


Desmond

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