This is the fourth section of snippet number two get rich numbers. we're concentrating on the company valuation at this time. We're going to go through a very detailed example, slowly. Don't be too frightened, I'm sure you'll figure it out by the time we get done. The real example is a fictitious company, but quite a realistic looking one. We'll take the seven steps, which we've discussed in section three.

And we'll apply them to using the financial statements that have been generated for this particular company. Again, I urge you to use a simplified Excel model. It'll help you keep things straight, quick up as the one that I use and you're welcome to purchase it at start with now calm. In this case, the financials are forecasting about an $88 million Sales number for year five. Depending upon the industry, they're in the future, what's hot and not and so forth. they've picked a multiple here of four times.

And they've applied that to the sales rate to get a value at liquidity in this case, an IPO of 350 million dollars of value. Then gone on to be able to say, look, I think we understand that we'll come back and review it later, but four looks pretty good right now. Done next step, value each year. This involves something very special, you need to match the risk curve or the return expected by investors in each year. And they'll expect a different return for each year. Why?

Because risk taking changes year after year. Basically, the 10 times is an average of successive rounds of financing, a round B round c round and so forth. The first one needs a very high return because it's very high risk. And as the risk drops, return requirement drops over time, your seed round is the most expensive to you, and costing you the highest percentage per dollar raised. Another important item to keep in mind is that the 10 x can be translated to the equivalent of interest in the bank. In other words, if you are able to get 10 times your money for each dollar invested, it's the same thing as getting interest have 52% per year per annum and laughing for your investment year after year.

The risk here is extremely high for investors. Early Stage investing is very, very risky and your odds are very, very, very low that things are going to work out the way you want to even when funded. To get through an initial public offering, your odds are nine out of 10 you're not going to get there you can see the results of an outstanding venture capital firms actual series of investments. This portfolio had 10% of the companies producing such big results that they compensated for the inferior results less than 10 x for all other investments along the way. 10% of the money produced seven times and 39 times return for two categories of investments called solids and winners along the way. Typically, the solids can get to IPO but are sold more likely.

And the winners are actually in the category of initial public offerings. The overall portfolio generated a multiple of 1.52% Considered outstanding. So this was just average. That will give you some indication of what 10 x means. What return is expected each year then if it changes year by year. This is an example of the risk dropping and the return dropping.

These are real numbers generated from large number of portfolios over extensive decades and are pretty good numbers to use as your benchmark your guideline when valuing your own company 20 times for year one investors six times a year two and so forth, lower and lower each year as the risk drops. That standard is a range and it's based upon the perception of the investors at a point in time. There's competition for startup deals, remember and that investor is looking for something that could be large perhaps, Hey, is this the next Facebook and he thinks about you To get those numbers requires some insider knowledge from other startups that will help you understand and private discussions, the numbers and the percentages that are involved, need to talk to people ask often and spend time with them gaining their trust. So they will tell you that kind of information.

This is all based upon a theory called discounted cash flow modeling. That is, the more risk the more return on investment expected and the future is worth much less than today. For highly risky companies such as startups brought back today it means the future is not worth very much frankly. Over time, the risk and reward are matched and year after year, the risk drops and the potential return drops. The result is that standard curve based upon real world experience. It produces graphs that look like this.

Now let's go back to our example and dive into more detail. We're going to choose this value and compare it to the standard curve along the way. we'll calculate how many shares we need for the people involved and value the company each year. And as a result, using quick up or another model, you can then begin to choose the value for each year that matches the investment for the expectation of the standard curve. The percent per annum equivalent on multiple you can is calculated using the rate function in Excel or any other formula. Your results the mahogany color here, then becomes the results and you can compare it to the standard curve pretty close here pretty good investment return potential.

In a tabular form, this is what it looks like 20 times for year one, two times for the investors in year two, and so forth. that produces then this company value that we're focusing on year by year discounted from the future to today, worth $12 million. done on to number three, adjusting the shares, Wall Street needs enough to trade. And you can change the number of shares for everyone, and it will not change the percentage they own. What we mean by that is that if you started with a million for everyone, and had 350 valuation, the price would be $350 per share. That's way out of the range that we need.

So instead, what you shoot 10 times the number of shares for everyone you're holding. Everybody gets 10 times more, no change in their percentage result then drops the price per share in the range we need. Mission accomplished. Can Continuing then, you can see that the price per share dollar 84 grows to $37. by year five new co shares outstanding are going to all be linked to the founder shares. As we change the founder shares, we can change everyone else's.

That's the way it really works. Everything is dependent upon those initial shares, they dominate. And if you've modeled this, it's very easy to change it. A model like this is all linked to that 5 million shares in this case. The result is that valuation and the money value of price per share down below that we're linking to. We now have adjusted the number of shares.

Step number four is to customize the stock option pool, talking to people to generate enough value for them to come and join you is very Important, adjusted, repeated. In this case we got 26% of the company reserved. We think that's enough out of that 79% 26% is reserved for the potential employees. Investors are going to get over another 20% for that 79. In addition, you've got 100% of the company. Done with number four.

What we're after is you to go back and repeat this until you're satisfied. Step one through four will often involve changing the initial public offering value or liquidity or sale accompany value. By changing the multiple or maybe changing your sales forecast. You can add alter the company's value each year for particular two years one into and modify your stock option pool. done enough times you'll get satisfied at that point in time what you're after is to take a look at the wealth created. What's the dollar value of each percentage involved?

This is a pretty good table. In this case year by year, you can see what the total investors get the pool gets and what the founders get. Another way to look at it is the dollar value of IPO wealth. If there are two or three founders, you can see that they're worth 10s of millions of dollars at least. And if you have enough employees, getting that 93 million there be some millionaires there. That will attract a lot of people to come work for you.

Done the six. Number seven is just to get going. Then it really gets exciting. There you are. Seven Steps. You made great progress, superb.

Remember, it applies to all sized companies, the method Multiple sales is the standard way it's done. Congratulations. Yes, I don't know, it seems like a lot that you've accomplished. And you should feel pretty good about it. You forecasted financial statements, you valued the company, you know what the wealth creation is all about. You can tell your story and numbers and be very happy about it.

You can answer all important questions comfortably. You feel good about your business, you're fluent about it along the way. Whether it's how much capital you need, or what portion the company will I get, you'll have good reasons for giving good answers to both of those along the way. You move from being frightened by set numbers through being pretty confident about them along the way. And frankly, the more that you do this, the better you'll get at it. Like all things in life.

It is simple, it is easy, and it can be very quick along the way. Use a financial model. It'll help you go faster and stay sane. Well, you'll find other quick courses and start winning now calm. I look Hope to see you there. That's where I'm heading now.

Bye for now. I wish you the very best on your adventure.