Learn about Going back to the till: Series B Video

Get it off your chest – be the first to comment on this video!

Learn about Going back to the till: Series B

Learn about Going back to the till: Series B So, where I left off in the last video, my buddies and I, we had a business plan and we have a great idea to sell socks online. We went to an angel investor. Here, he originally gave us a $5 million. He’d valued what we already had at $5 million. So, since he was giving us $5 million, we had $5 million. He got 50% of the company and we have the other 50% and we have $2 million total shares. And we took four of that million. Let’s say six months have passed. We hired 50 people and we finally built a working version of our website but we now are about to run out of cash. We still haven’t started selling things. And we’ll actually have to start selling a lot of things before we have enough money to support ourselves. So, we need to go start raising money again and we also wan to spent money in marketing and all the rest. So, we go to some professional investors. We’ll go to seed venture capitalist and we’re going to do our series A round of funding, which just means our first kind of professional venture capital round of funding. And we finally find a team that they like us and we start getting to the negotiation. They say, “You know what? You guys say you need $10 million, we believe you. We know that that’s what it takes and we think you have a good business.” So, let’s see. Let me say that we need to raise $10 million and so that I make that clear. And we need it for ongoing expenses and of course we’ll have a big business plan and everything that further flashes this out. And we’re going to some marketing, etc. So they say, “You know, we have $10 million and we think this is a hot space because we know those other VCs across the street also invested in an online undergarment play and we know that that’s the hot thing right now, so we’re also going to do it.” So, the question now is, what do they get for their $10 million? So once again, we get into this. What is the company worth right now? So once again, they’re going to do a pre-money valuation. So, what is this whole thing worth right now? So they’ll say, “You know the idea is good.” They won’t like break down. They won’t say, “Oh, the idea was worth $5 million.” But the general idea is hopefully, from that stage where the post-money valuation was $10 million. Back here is $10 million, now we did a bunch of work. We use some of these $5 million and we did a bunch of work. Hopefully, we added value. If we added value, our value of this stuff now, we turn this cash into other types of assets like a website and other things and knowledge in our firm and expertise and all of that stuff. Hopefully now, what we have here is worth more than $10 million. Otherwise, we kind of destroyed wealth. And all of this is very intangible. It’s very hard for someone to really place a value on things at this point, a lot of VCs, they kind of swing for defenses. They’re like, “You know what? These guys have a 10% chance of being worth a billion dollar and a 90% chance of we’re being worth zero. If I make 10 of these bets, at least one of them is going to pay off and make my whole fund” And so that’s how they kind of think. So, at this level, they’ll do some hard negotiating. But in often times, this is going to, not at this level. This is where we are right now. It’s kind of what other people got for this stage of a company. They’ll say, “You know you have a pretty good build up website. Those other guys who had a pretty good build out website at this point, those guys across the street, they had to give a $20 million pre-money valuation but you know you guys have a market that isn’t as big as the broader undergarments market. You’re just socks.” So, the opportunity isn’t as big, so we’ll give you a $15 million pre-money valuation. So, they’re saying that we have right now is worth $15 million. And that is pretty good. I mean if that were reality. If that really is worth $15 million, then what are our shares worth right now? Notice, they haven’t given us any money. This is the pre-money valuation. So, $15 million divided by $2 million shares; that’s how many we have right now. So, what is the value per share? $15 million divided by 2 is 7.50 per share. That is pretty good because back here, remember this is kind of a scenario that didn’t happen, that was kind of a negative scenario. But back here, when the pre-money was $5 million for $1 million shares, it was $5 per share then it became $10 million dollars for $2 million shares until $5 per share. But before and after this round, that angel said, “Your share is worth about $5 per share. Now, this VC who is a professional investor and has teams of MBAs making spreadsheet for him says that, “Actually, what we have right here is worth 7.50 of shares. So, just over those 6 months, we actually got a 50% return on our shares if you believe that and the angel investor is happy. He feels good about it. This was vindication for his bet on us, so we feel good. We feel like we’ve given him at least in a short term return. So anyway, we had $15 million pre-money valuation and I’ll let you think about is, what’s post-money valuation? What happens when you layer on the $10 million from this venture firm? Actually, just to make the math simple, let’s say that we’re raising $7.5 million. Let’s say that we wanted $10 million but we were hoping for $20 million pre-money valuation because that’s what the other guys got. And since they’re only giving us a $15 million pre-money, we just don’t want to take as many shares from them because we don’t want to give as much of the company away. So, we’re just going to take $7.5 million because we think that’s just enough that we need to keep going. So, we do that. We take $7.5 million from this seed venture capitalist. We take $7.5 million. And he essentially valued our old shares at 7.50 per share. So, for $7.5 million at 7.50 per share, he should get another million shares. So, what we’re going to do, this angel investor is probably sitting in our board now because he owns so many of the shares. The board of directors of a firm is essentially elected by the shareholders. So, if you have 50% of the shares, you can put yourself on the board and you could probably put some other people on the board of directors as well. So, we had $2 million. These guys get a million. How many shares do we have now? We now will have $3 million shares. So, we had to issue another million shares and what is our post-money valuation? Pre-money was 15. We have $7.5 million now. Our post-money valuation is $22.5 million. And now, what percentage does each of us own? So, the angel investor owns $2 million shares like he used to. He now owns $1 million out of $3 million shares. So now, he owns 30%. The seed VC, he has million out of $3 million, so he owns—well, this is 33 in a 3rd percent. This seed VC owns 33 in a 3rd percent and then me and my buddies, we collectively own 33 in a 3rd percent and I have a 5th of that, so I have a little over 5%. So, the founders, that’s us. We still have about a 3rd of the company. And now, we have the $7.5 million we just raise plus we have the $1 million of cash that we had before. We have $8.5 million to keep on going with our business. So, let’s say another six months go by. So, our old balance sheet—so let me draw all of the shares. I want to a couple of more rounds of financing before I take the company public. So, this is my slice down here, $200,000.00. This is the angel investor. This is the seed VC. Let’s say after another six months, we’ve burned through the case. We’ve marketed the website. We have only $1 million left and that’s usually our trigger point for when we want to raise more money. In fact, we probably would have to do it at $2 million because we’ve raised more employees and we’re burning more cash or cash burn is essentially how much cash is going out of the door every month because your business still isn’t making money. And of course, you have all of the assets of the firm which essentially you know it’s a website and offices and the knowledge, some of it intangible. So, website and everything that comes in with it. Your brand now that you probably have because you’ve market it, so people will recognize socksonline.com. I don’t know if that already exist, so forgive me if I am actually somehow insulting a real business out there. But you have a brand now. So, you’re almost ready. You’re actually generating revenue but you’re still kind of cash flow negative. You’re burning less money because people are actually going to your site. They’re buying stuff. But you just need a little bit more money you think to get profitable. Once you get this amount of money, you’re ready to go. So, you go to another VC. Once again, a lot of them turn you away but one guy finally says, “Okay. I’ll give you some money.” And you say, “You know I need $5 million?” This is fair enough. I am going to value your business at—and let’s say we’re in an optimistic world, so we’re doing up-rounds. Up-rounds are when your pre-money valuation of this round is more than the post-money valuation of the last round. So, the value is going up. You’re creating value. It would be down-rounds, like here; they valued us at $15 million while the post-money of our last round was $10 million, so that was an up-round. If these guys said, “No way.” think the world has changed, we’re only going to value all of this stuff at $8 million, then that would be a down rounds and no one is happy about that. We’ll talk about the repercussions of that in the future. Why down rounds aren’t good. So often times, you actually don’t want to get too good of valuation because if you get too good of valuation, in the next round, it might be a hard to get people who are going to give a better valuation. You might be forced to take a down round which has negative aspects. But just quick and dirty, you need your prominent brand now to at least easier for you to raise money. You go to some VC who specializes and kind of helping people get to that profitability stage. And what you do is you raise your series B. And just put it simply, it’s an up-round. Your post-money form your last round was $22.5 million. You generated some value, so now they say, “You know what? Your business is worth $30 million.” And you need another $10 million to really pump up the marketing. How many shares do they get? Well, the pre-money was $30 million. We had $3 million shares so they’re assigning us a value of essentially $10 a share which is great. Remember the first round, the angel gave us $5 per share, second round, we got $7.50 per share and now we’re getting $10 per share. So, if we’re selling him shares at $10 per share, we just have to issue another $1 million shares to get $10 million. So, another $1 million shares and this goes to VC too, the second VC and that’s our series B, we raised $10 million. So, we’ve done one round of angel investing and then we’ve gotten our series A that gave us the $7.5 million. Then we did our series B that gave us $10 million and we could keep doing the series C, series D and so on and so forth. And I’ll continue this in the next video.

Khan Academy

The Khan Academy is a not-for-profit organization with the mission of providing a high quality education to anyone, anywhere.

http://www.khanacademy.org/

Learn about Going back to the till: Series B

So, where I left off in the last video, my buddies and I, we had a business plan and we have a great idea to sell socks online. We went to an angel investor. Here, he originally gave us a $5 million. He’d valued what we already had at $5 million. So, since he was giving us $5 million, we had $5 million. He got 50% of the company and we have the other 50% and we have $2 million total shares. And we took four of that million.

Let’s say six months have passed. We hired 50 people and we finally built a working version of our website but we now are about to run out of cash. We still haven’t started selling things. And we’ll actually have to start selling a lot of things before we have enough money to support ourselves. So, we need to go start raising money again and we also wan to spent money in marketing and all the rest.

So, we go to some professional investors. We’ll go to seed venture capitalist and we’re going to do our series A round of funding, which just means our first kind of professional venture capital round of funding. And we finally find a team that they like us and we start getting to the negotiation. They say, “You know what? You guys say you need $10 million, we believe you.

We know that that’s what it takes and we think you have a good business.” So, let’s see. Let me say that we need to raise $10 million and so that I make that clear. And we need it for ongoing expenses and of course we’ll have a big business plan and everything that further flashes this out. And we’re going to some marketing, etc.

So they say, “You know, we have $10 million and we think this is a hot space because we know those other VCs across the street also invested in an online undergarment play and we know that that’s the hot thing right now, so we’re also going to do it.” So, the question now is, what do they get for their $10 million? So once again, we get into this. What is the company worth right now?

So once again, they’re going to do a pre-money valuation. So, what is this whole thing worth right now? So they’ll say, “You know the idea is good.” They won’t like break down. They won’t say, “Oh, the idea was worth $5 million.” But the general idea is hopefully, from that stage where the post-money valuation was $10 million. Back here is $10 million, now we did a bunch of work. We use some of these $5 million and we did a bunch of work. Hopefully, we added value.

If we added value, our value of this stuff now, we turn this cash into other types of assets like a website and other things and knowledge in our firm and expertise and all of that stuff. Hopefully now, what we have here is worth more than $10 million. Otherwise, we kind of destroyed wealth. And all of this is very intangible. It’s very hard for someone to really place a value on things at this point, a lot of VCs, they kind of swing for defenses. They’re like, “You know what? These guys have a 10% chance of being worth a billion dollar and a 90% chance of we’re being worth zero. If I make 10 of these bets, at least one of them is going to pay off and make my whole fund” And so that’s how they kind of think.

So, at this level, they’ll do some hard negotiating. But in often times, this is going to, not at this level. This is where we are right now. It’s kind of what other people got for this stage of a company. They’ll say, “You know you have a pretty good build up website. Those other guys who had a pretty good build out website at this point, those guys across the street, they had to give a $20 million pre-money valuation but you know you guys have a market that isn’t as big as the broader undergarments market. You’re just socks.” So, the opportunity isn’t as big, so we’ll give you a $15 million pre-money valuation.

So, they’re saying that we have right now is worth $15 million. And that is pretty good. I mean if that were reality. If that really is worth $15 million, then what are our shares worth right now? Notice, they haven’t given us any money. This is the pre-money valuation. So, $15 million divided by $2 million shares; that’s how many we have right now. So, what is the value per share? $15 million divided by 2 is 7.50 per share. That is pretty good because back here, remember this is kind of a scenario that didn’t happen, that was kind of a negative scenario. But back here, when the pre-money was $5 million for $1 million shares, it was $5 per share then it became $10 million dollars for $2 million shares until $5 per share. But before and after this round, that angel said, “Your share is worth about $5 per share.

Now, this VC who is a professional investor and has teams of MBAs making spreadsheet for him says that, “Actually, what we have right here is worth 7.50 of shares. So, just over those 6 months, we actually got a 50% return on our shares if you believe that and the angel investor is happy. He feels good about it. This was vindication for his bet on us, so we feel good. We feel like we’ve given him at least in a short term return.

So anyway, we had $15 million pre-money valuation and I’ll let you think about is, what’s post-money valuation? What happens when you layer on the $10 million from this venture firm? Actually, just to make the math simple, let’s say that we’re raising $7.5 million. Let’s say that we wanted $10 million but we were hoping for $20 million pre-money valuation because that’s what the other guys got. And since they’re only giving us a $15 million pre-money, we just don’t want to take as many shares from them because we don’t want to give as much of the company away. So, we’re just going to take $7.5 million because we think that’s just enough that we need to keep going.

So, we do that. We take $7.5 million from this seed venture capitalist. We take $7.5 million. And he essentially valued our old shares at 7.50 per share. So, for $7.5 million at 7.50 per share, he should get another million shares. So, what we’re going to do, this angel investor is probably sitting in our board now because he owns so many of the shares. The board of directors of a firm is essentially elected by the shareholders. So, if you have 50% of the shares, you can put yourself on the board and you could probably put some other people on the board of directors as well.

So, we had $2 million. These guys get a million. How many shares do we have now? We now will have $3 million shares. So, we had to issue another million shares and what is our post-money valuation? Pre-money was 15. We have $7.5 million now. Our post-money valuation is $22.5 million.

And now, what percentage does each of us own? So, the angel investor owns $2 million shares like he used to. He now owns $1 million out of $3 million shares. So now, he owns 30%. The seed VC, he has million out of $3 million, so he owns—well, this is 33 in a 3rd percent. This seed VC owns 33 in a 3rd percent and then me and my buddies, we collectively own 33 in a 3rd percent and I have a 5th of that, so I have a little over 5%. So, the founders, that’s us. We still have about a 3rd of the company. And now, we have the $7.5 million we just raise plus we have the $1 million of cash that we had before. We have $8.5 million to keep on going with our business.

So, let’s say another six months go by. So, our old balance sheet—so let me draw all of the shares. I want to a couple of more rounds of financing before I take the company public. So, this is my slice down here, $200,000.00. This is the angel investor. This is the seed VC. Let’s say after another six months, we’ve burned through the case. We’ve marketed the website. We have only $1 million left and that’s usually our trigger point for when we want to raise more money.

In fact, we probably would have to do it at $2 million because we’ve raised more employees and we’re burning more cash or cash burn is essentially how much cash is going out of the door every month because your business still isn’t making money. And of course, you have all of the assets of the firm which essentially you know it’s a website and offices and the knowledge, some of it intangible. So, website and everything that comes in with it. Your brand now that you probably have because you’ve market it, so people will recognize socksonline.com. I don’t know if that already exist, so forgive me if I am actually somehow insulting a real business out there. But you have a brand now.

So, you’re almost ready. You’re actually generating revenue but you’re still kind of cash flow negative. You’re burning less money because people are actually going to your site. They’re buying stuff. But you just need a little bit more money you think to get profitable. Once you get this amount of money, you’re ready to go. So, you go to another VC. Once again, a lot of them turn you away but one guy finally says, “Okay. I’ll give you some money.” And you say, “You know I need $5 million?”

This is fair enough. I am going to value your business at—and let’s say we’re in an optimistic world, so we’re doing up-rounds. Up-rounds are when your pre-money valuation of this round is more than the post-money valuation of the last round. So, the value is going up. You’re creating value. It would be down-rounds, like here; they valued us at $15 million while the post-money of our last round was $10 million, so that was an up-round.

If these guys said, “No way.” think the world has changed, we’re only going to value all of this stuff at $8 million, then that would be a down rounds and no one is happy about that. We’ll talk about the repercussions of that in the future. Why down rounds aren’t good. So often times, you actually don’t want to get too good of valuation because if you get too good of valuation, in the next round, it might be a hard to get people who are going to give a better valuation. You might be forced to take a down round which has negative aspects.

But just quick and dirty, you need your prominent brand now to at least easier for you to raise money. You go to some VC who specializes and kind of helping people get to that profitability stage. And what you do is you raise your series B. And just put it simply, it’s an up-round. Your post-money form your last round was $22.5 million. You generated some value, so now they say, “You know what? Your business is worth $30 million.” And you need another $10 million to really pump up the marketing. How many shares do they get?

Well, the pre-money was $30 million. We had $3 million shares so they’re assigning us a value of essentially $10 a share which is great. Remember the first round, the angel gave us $5 per share, second round, we got $7.50 per share and now we’re getting $10 per share. So, if we’re selling him shares at $10 per share, we just have to issue another $1 million shares to get $10 million. So, another $1 million shares and this goes to VC too, the second VC and that’s our series B, we raised $10 million.

So, we’ve done one round of angel investing and then we’ve gotten our series A that gave us the $7.5 million. Then we did our series B that gave us $10 million and we could keep doing the series C, series D and so on and so forth. And I’ll continue this in the next video.

Transcription by: Scribe4you Transcription Services