So where I'd left off in the last video,
we had kind of talked about the scenario
where my buddies and I, we came up with this idea to sell socks online.
We went to a rich investor we called an angel investor,
who's usually kind of a rich uncle type of figure
who gets excited by young guys innovating in the world.
And we say hey, we need $5 million, he says sure enough.
I think the idea you have, by itself
or maybe some kind of prototype you might have made or something,
that's worth $5 million.
So I'll give you another $5 million of cash to kind of get started,
rent some space, hire some people.
And for that, since what you had was $5 million,
that's what you're bringing to the table,
I'm bringing $5 million cash to the table,
I essentially get half the company.
And the way that works is,
it's not like we each gave him half of our shares.
Instead, since we are the board of the company,
we issue another million shares,
so we double the share count and we give it to him.
And this pre-money valuation is really, really important.
Because if we had agreed-- if we said this wasn't five million,
if we said this is, I don't know,
if he is a hard negotiator and he says no,
that's only worth a million dollars.
And I'm going to give $5 million.
So let me ask you, how many shares would we have to issue?
So think about it.
If he was a hard negotiator-- let me draw it down here,
I don't want to mess up the issue-- because our idea--
I mean it really is a hard thing to estimate
what an idea is worth.
So if he negotiates hard,
at the end of the day, we're desperate.
Financial markets have collapsed.
So we'll take money from
whoever is willing to give it to us.
And we really want to quit our jobs.
So he says that what we have right now,
our idea is only worth a million dollars.
And he's going to give us $5 million.
So how many shares do we have to give him?
This right here, this is a million shares.
That's what we started off with.
So when he says that what we have right now is worth a million dollars,
he's essentially saying
that it's worth a dollar per share.
So my 200,000 shares are worth $200,000
according to his valuation.
Up here, we said that what we had before was worth $5 million
in the previous video.
If what we had before is worth $5 million
and there were a million shares initially,
then the pre-money valuation
--or actually it's the valuation either pre- or post-money--
would be $5 per share.
And in the $5 per share world,
what we did was we issued another million shares
and sold them for $5 million.
Or we sell them for $5 per share to get the $5 million.
And so, we ended up with a 50/50 split of the company.
This is the angel investor, and this is all of us down here,
and all of this is equity.
No debt, no liabilities just yet.
Now in this reality, if he's valuing what we have right now
at essentially $1 per share--he says it's worth a million dollars,
you have a million shares, it's $1 per share.
In order for him to give $5 million,
he's essentially going to buy $5 million worth of stock at $1 per share.
So he's essentially going to need five million shares.
And notice, in the situation up here-- before,
when I have 200,000 shares-- well, when I had 1/5 of $5 million--
when I had 1/5 of $5 million,
the value of my shares was $1 million, right?
And then when I have 1/10 of two million shares,
I still have 1/10 of $10 million of total asset value,
because now he threw in his $5 million.
And so my share is still worth $1 million.
I have 1/10 of ten million
as opposed to 1/5 of five million.
In this situation I used to have 1/5 of one million,
which would be $200,000.
And now I have 200,000 over
--how many total shares are there now?--
there are now six million shares.
So now I have 1/60--is that right?
I now have 200,000 over six million.
That's 6,000 thousands, that cancels out.
I now own 1/30 of the company.
Before I had 1/5.
And we're valuing it at six million
because I have a million here and five million here-- times six million.
And so, what's 1/30 of six million.
6/30 is equal to 1/5 of a million
so this is still $200,000.
So no matter what I do,
between the pre-money and the post-money valuation,
my per share value doesn't change any.
And I wanted to show you that.
But this matters a lot, right?
Because based on what this pre-money valuation is
it tells us how many shares,
or what percentage of the company,
our angel investor gets for investing his $5 million.
In this case he gets 5/6 of the company, what is that?
Five times-- that's like 80% of the company.
I think, roughly, and we are left with the other
-- no, 1/6 is, no it's more than 80%, it's like 84%--
and we're left with, like, 16% of the company.
So it's a very different scenario
depending on what our pre-money valuation is.
And of course the pre-money valuation is just--
you just take the pre-money valuation
plus the amount of cash they're giving us.
That's post-money valuation, right?
The amount of money you get.
Pre-money and then post-money, you add the money in,
and that's where you get the $6 million valuation.
Fair enough.
I think I've beaten this horse dead now.
I think you have a good sense of it.
Let's say that we end up lucky.
The guy wasn't a hard negotiator
and we ended up with that first situation.
So let me redraw it.
So now if I were to draw the assets of this corporation,
at least at the time of that guy's investment,
where the very intangible asset, we called it the idea,
now has a value, $5 million.
And we have some cash, we have $5 million in cash.
And then, if we do the shares
--let me do that in another box--
there you go, there are the shares.
And of that share, we have 2 million shares outstanding.
I have one million to the angel investor,
so he has 50% of the shares.
And just because I like to keep track of my slice,
there's 200,000 shares that go to Sal.
Fair enough.
Now, obviously the whole point of this
wasn't just to negotiate, raise money and quit our jobs.
The whole point of this was to start a business.
So let's say we take this $5 million
and we start hiring people.
And really our first step is to build out our website,
and just kind of have a working site going.
So let's say we burn through $4 million of that
and we built a site.
So let's say we only have a million dollars left--
this is maybe six months in the future we all quit our jobs.
We got some fancy loft-like office space.
We got a Foosball table.
And we also built a website,
we hired some graphic designers and things.
And so, we burned through most of our cash,
and we're starting to get a little bit worried,
because we haven't made a profit yet.
But we have a neat website.
Something that-- when we went to the angel investors
we just had an idea, a business plan,
we just had-- hopefully we had our charisma
and we were able to sell the guy on the idea.
He thought we were going to be
the next dominant sock player in the world.
But now we actually built something.
We took his money and,
as promised, we built a nice website.
And now, we need to raise more money.
One, because we've hired 50 people.
And this million dollars isn't going to last us too long.
And that would be a shame.
To run out of cash just when we're getting off the ground.
We now actually have a real website
and offices and all of that.
And we want to raise some money
because we want to put up some AdWords on Google,
so people know about our site.
We want to spend, you know,
a couple million dollars for a Super Bowl ad,
so people know that they can get socks online now.
So we have to raise more money.
And now at this stage,
we would go back to the venture capital community.
But we wouldn't go to the angels.
The angels are the guys who like the big picture,
who want just to kind of throw some money into an early idea.
It's usually a relatively small amount.
Actually, $5 million would be a large amount for an angel.
We want to go to kind of real professional VC's now.
And what we would do is we would go to a seed VC.
So seed VCs are kind of the first round.
And each round is kind of,
every time you have to go back to the till to raise money,
that's kind of a round of financing.
But seed investors-- so there's a lot of words for it--
but seed investors are usually VC investors
who are actual professionals at what they do.
They're actually managing other people's money.
And we'll do another video on how they raise that money,
and it's very related to how private equity confirms,
and hedge funds also raise their money.
But they're usually managing other people's money,
while an angel investor is usually, you know,
he's just sitting on top of a big pile of money and likes to play with it.
So they're managing other people's money,
and they tend to have some fancy MBAs that they just hired,
who will make models and do projections,
and negotiate a little bit harder with you
when you're actually trying to get a value on your business.
But we have to go to these guys.
Now they have some value.
They'll connect us with other dudes.
And they have experience starting businesses.
They can introduce us to
other people who have done similar things.
And all the rest-- help us network,
and help us manage the business.
So we go to a venture capitalist,
and we get the door closed a lot of times on us.
But one venture capitalist,
one seed venture capitalist finally comes to us.
And the terminology can be a little ambiguous here,
but we'll call it our Series A financing.
Series A.
Sometimes it'll be called your seed financing,
but we'll call it Series A because we want to formalize it.
And just so you know,
the A is because it's our first real formal round of financing.
In our second round, which I'll do probably in the next video,
it will be Series B, and then Series C,
and then Series D.
Every time we run out of cash,
we want to go back to the till.
We've already done a Series A, now we want to do a Series B,
and a Series C, and so forth and so on.
And eventually we'll hopefully get to some type of an IPO,
which I'll talk about it the next video.
Because I just realized I'm out of time again.