A startup business needs to set a minimum return rate it will accept on its investment projects. This rate is referred to as the hurdle rate and can be calculated using the Excel RATE function.
Funding Milestones for a Startup Business
Achieving funding milestones reduces the risks associated with a business and allows it to seek a higher valuation and additional funding from potential investors.
Startup Death Valley Curve
The startup valley of death curve or startup J curve plots the cash balance of a business against time. A lean startup business can be identified by the shape of its curve during the bootstrapping period.
WACC Formula – Cost of Capital
The cost of capital for a business is the average of the cost of equity and the cost of debt. The weighted average cost of capital formula (WACC) takes into account the level of debt and equity finance used to fund a business to calculate its true cost of capital.
Business Life Cycle Stages of a Start-up
The business life cycle model uses 4 stages start-up, growth, maturity, and decline to define the different phases a business will experience in its lifetime. Each stage comes with its own characteristics and problems to solve, and the business must determine which stage has been reached in order to be able to plan and forecast effectively.
Enterprise Value vs Equity Value
Enterprise value (EV) and equity or market value (MV) are two different terms used in the determination of the value of a business. Enterprise value is the value placed on the net operating assets of a business by all stakeholders, whereas equity value is the value placed on all assets of the business less its net debt by equity holders.
Cost of Preferred Stock for Startups
When a business uses preferred stock equity to fund its operations the cost of preferred stock forms a part of the weighted average cost of capital of a business.
Series A Cap Table Modeling and Convertible Notes
When a business outgrows the funding provided by angel investors it might seek more substantial investment from a Series A funding round. The Series A round is often a trigger for the conversion of convertible loan notes and an increase in the stock options pool. The Series A capitalization table is used to show the effect on the percentage ownership of a business following these changes.
Angel Investors Cap Table Modeling
When a business has outgrown funding from family and friends it might seek more substantial investment from business angels to fund for example product development, prototype production and market research. The angel investors cap table is used to show how the current shareholders, including the founders, are diluted by the introduction of this seed investment.
Pre-Seed Investors Cap Table – Startup
When a business is in its early stages and has perhaps developed an idea but does not yet have a working prototype of its product or traction and revenue, it often needs to be funded by outside investment capital from family and friends or other pre-seed investors. The pre-seed investors cap table can be used to demonstrate how the founders are diluted by the introduction of this outside investment.
Stock Option Pool – Effect on Cap Table
A stock options pool is created by a startup business in order to set aside sufficient shares to enable it to build up, incentivize and retain a team of key personnel. The effect of the stock options pool is to dilute the existing shareholders.
Pre-Investment Cap Table for Startups
The startup cap table is a record of who owns what percentage of the equity of a startup business. Prior to any investment it simply represents the ownership of the founders and any equity awarded to the team including employees, consultants, and advisers.