dickbaker - 12:27 am on Jan 27, 2012 (gmt 0)
I'm still working on a business plan I started last September for a new website. I've been working with volunteer advisors from SCORE, as this is a more ambitious project than I've undertaken before. The last counselor I met with really likes the plan, and wants me to present my plan before a group of angel investors. Before I do so, he suggested I make some changes to the plan.
One thing he suggested changing was the payout to the investors. I had structured the investment as debt, with repayment in one year paying 50% interest, or repayment in two years paying 100% interest, or repayment in three years paying 200% interest.
The advisor told me that angel investors typically want the payout structured as equity, and are looking to make 1000% over a period of five years, or some portion of that return over a shorter period of time in the form of converting some equity to cash.
I'm not very familiar with figuring out valuations for a business for such purposes, and so I'm in the dark. I'm working backwards, trying to reach the 1000% figure using my projected pre-tax profits.
So, if I have $5 million in pre-tax, pre-amortization, pre-depreciation profits in the 5th year (just throwing out this number as an example), and the investors had put up $100,000 to begin with, then they would expect to get $1,000,000. That would be 20% of the company if the value of the company was a multiple of one, correct?
But it's my understanding that the value of a company is usually 3-6 times earnings, so the investors' shares should be less than 20%, right?
I'm sure the advisor can help me with this, but I figure the less I look like an idiot to him, the better.
Any advice much appreciated.