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Chapter 9. Valuation of Companies > Issuing Stock to Investors

Issuing Stock to Investors

Venture capital investors valuate a company according to one or more of the models mentioned above, while using the discount rate required by the company's risk level. The result is the company's post-money value, based on the assumption that the company managed to raise the capital it needs to implement its plans. Post-money value makes it possible to calculate pre-money value, namely, the company's value after the investment minus the amount of the investment. The share which the investor will demand in the company's equity is also derived from the amount infused by investors into the company and from the company's post-money value.

Following is an example of an ordinary issuance (see the section on the number and price of the shares allotted to the investor), followed by an example of an investment made with the allocation of a pool of options and shares for employees (see the section on investment rounds with a pool of employee stock options). Investors usually require at the time of the share issuance that the calculation of the value and the number of issued shares be made on a fully diluted basis. Although the options are not allotted to the employees at the time of the issuance, a pool of options (15–25% in the early phases) is reserved, thus assuring investors that they will not be diluted in the future due to the allotment of options to employees. Since the entrepreneurs bear the cost of the pool, such an allotment may be seen as a “discount” of sorts on the price given to the investors. This is because they receive more shares for the same investment so that their share after the investment round and the allocation of the pool is identical to the share they would have received had they been promised that no diluting issuances would be performed in the future.


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