The capital structure of a business is the mixture of equity and debt it uses to finance its operations. The optimum capital structure is one which minimizes the weighted average cost of capital and thereby maximizes the valuation of the business.
Estimate New Capital
New equity capital is included in the cash flow statement of the projection as a positive figure as it represents cash flowing into the business from investors. For example, if in year two the plan inject new capital of 5,000 to finance the purchase of new machinery, the figure of 5,000 should be included in the cash flow statement on the proceeds from the issue of new share capital line.
Convertible Note Calculator
The convertible loan note calculator shows the effect on the capitalization table of new equity investment when this triggers the conversion of a loan note. The calculator takes into account the impact of any discount or cap contained within the convertible loan note agreement.
Convertible Loan Notes
Start-up businesses use convertible promissory notes to raise seed capital finance as they avoid the difficult process need to value the business valuation. The loans are repaid by the issue of new shares to the noteholders.
Cost of Equity Financing in Startups
Equity financing is one method of funding a business. The cost of equity financing arises from the fact that part of the ownership of the business is sold in return for the funds, and a percentage of the profits now belongs to the investor shareholder.
Crowdfunding and Financial Projections
Crowdfunding is a technique for a business to obtain finance in which small amounts of funding are raised from a large number of people (the crowd). Crowdfunding can be either rewards, debt or equity based depending on the requirements of the business.
Startup Funding Requirements
The shape of the cumulative cash flow graph is referred to as the j curve or death valley curve, as it identifies the level of funding a business needs to have available to survive the startup years.
How to Estimate Startup Capital
Having estimated the startup costs of the business for the financial projection, it is now necessary to consider how these costs are going to be funded. Funding can be provided either by way of capital or debt.
Startup capital is the amount of cash injected into the business by the founders and the investors to help fund the start up costs. Any startup costs not funded by capital investment will need to be funded by debt and borrowings.
In return for injecting the startup capital, the owners and investors receive a percentage of the equity of the business, and make a return on their investment either by way of capital appreciation when the business is sold, or by way of dividends paid out by the business.
Startup Equity Calculator
A startup business needs to decide how the equity in the business is divided between the co-founders and the investors.
The situation is complicated by the fact that the co-founders, in addition to their cash investment, also need compensating for other matters such as the original idea, the amount of time they invest in the business at reduced or zero paid salary, and factors such as their contribution to the business plan, domain expertise, commitment and risk, responsibilities etc.
Based on the information provided, this simple startup equity calculator calculates the percentage equity each investor and co-founder should receive. The calculator allows for up to five investors and two co-founders.