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Raising money for a startup | Stocks and bonds | Finance & Capital Markets | Khan Academy - YouTube
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Let's say I'm hanging out with
my buddies one night and we
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realize that there's a
huge opportunity in
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selling socks online.
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And so we decide to
start a company.
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So the first thing we
would do is we would
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write a business plan.
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And say, you know what?
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In this business plan writing
process, this is all we've all
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contributed to it
individually.
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So we'll all be equal
shareholders.
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Let's say there's five
of us friends.
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So the first thing we want to
do is we want to start a--
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well you know, you could do in
different orders, you could
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just write up a business plan,
or you can start the
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corporation.
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But we'll just assume we
start a corporation.
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And I'm going to indicate the
corporation by creating a
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balance sheet right
from the get-go.
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So, what are the assets of the
corporation, and what are the
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debt-- and what are the
liabilities-- and we could
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talk a little bit about what
a corporation even is.
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So it's asset to begin with.
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It's essentially just an idea.
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I mean, you could say it takes
physical form to some degree
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in the business plan, but it's
just an idea first. And then,
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there are no immediate
liabilities, it doesn't owe
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anybody any money.
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And we learned in the balance
sheet videos-- and you might
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want to watch the balance sheet
videos as a prerequisite
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to this one-- but in general,
assets are equal to
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liabilities plus equity.
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So this is assets.
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The only asset we have right
now is our idea.
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Maybe you want to add the
potential talent that we have,
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maybe unique skills.
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They are very intangible
at this point.
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These are the assets that our
five buddies have together.
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And we have no liabilities.
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It doesn't sound like we
borrowed money or anything.
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So everything we have-- so the
assets are equal to our
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equity-- and I'll do that in a
brown color-- so there's no
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liabilities and we
just have equity.
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And equity is essentially what
the owners of the company have
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the rights to.
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For example, if-- I haven't
assigned any numbers here and
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I did that for a reason-- but if
the assets were $10 million
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and liability was $5 million,
if we had owed $5 million to
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someone else, then you
would have $5 million
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left for the equity.
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And that's what the owners of
the company would have.
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Me and my five buddies, or I
guess my four buddies, we
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decide we're the owners of the
company, so we'll be equal
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shareholders.
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So we would split the equity
between us five ways.
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So we just pick an
arbitrary number.
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Let's say to begin with we have
a million shares, so each
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of us have 200,000 shares
in the company.
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And that's a bit of an
arbitrary notion.
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And you normally do assign some
value to those shares
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initially, it's some pennies
per share, but I won't get
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into the technicalities
of that.
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Just fair enough to say that we
each have 200,000 shares in
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this company.
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And some of them go to me and
then the rest of them go to
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buddy one, buddy two, buddy
three, and buddy four.
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This is the equity right here.
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And there's a total of one
million shares outstanding.
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Good enough.
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Well, just an idea and some
paper and some well
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intentioned individuals
alone isn't
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enough to start a company.
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We're going to have to create
some type of an online
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presence, and do some
programming, and maybe have a
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warehouse, and do
some marketing.
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So we're going to have to-- and
really we're going to have
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to quit our jobs so that we can
work on this full time.
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So we're going to have
to raise some money.
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Money to hire some engineers, so
that we can quit our jobs.
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To hire some marketing people,
et cetera, et cetera.
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So where do we get
our money from?
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So this is where the whole
venture capital world comes
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into the picture.
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You've heard the word before.
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I think you have some
sense of what it is.
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And the venture capital world,
it's kind of separated into
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different people who invest
in different stages.
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So you'll have people, they're
called angel investors.
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And sometimes these people won't
even call themselves
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venture-- angel investors.
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And these are the guys that
are kind of these, I don't
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want to stereotype it, but
they'll be kind of like the
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old guys who made it big in
the `80s and now they're
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sitting on billions
of dollars.
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And they want to participate
in the neat, fun ideas that
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young guys like me and
my friends think of.
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And so they're kind of like your
rich uncle who says, oh
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that's a great idea, I'll throw
some money behind that.
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They usually invest at
a very early stage.
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So those are probably
the people
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we would go to initially.
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And then we'll talk to the
people after that, the other
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types of venture capitalists.
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But in general, venture
capital can
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meet a lot of things.
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But it means someone who's
going to give you money.
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They're going to take a stake in
your company and hope that
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your-- they give you enough
money to kind of get your
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venture going.
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To kind of start
your business.
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So let's say we go to an angel
investor, and we say hey,
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angel investor, don't you think
this is a great idea?
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We're going to sell
socks online.
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You know, socks are something
people run out of every week,
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we can even do subscriptions
for socks.
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You get 10 pairs of month,
et cetera, et cetera.
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You can give them as gifts.
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All of these lovely things.
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And the first nine guys slam
their doors on our face.
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They think our business
is stupid.
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But the tenth guy says, hey you
know, that's interesting.
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So we enter into negotiations.
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And he's like, you know what?
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I'm going to invest. But we have
to figure out what I'm
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going to get in exchange for
investing in your company.
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How much of your company
I'm going to get.
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And so this leads to a
process of valuation.
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So let's say we say need $5
million from the angel
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investor to get started.
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We need $5 million-- let me
write that down-- that's what
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we say we need.
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And that's what the angel
investor says that he's
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willing to give us,
because he agrees.
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$5 million, that's enough for us
to quit our jobs, and then
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we could all take salaries
for some time.
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We could hire a bunch
of people.
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We can rent office spaces.
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Do everything you need to
do to start a company.
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And $5 million will support
that for, I don't
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know, a year or two.
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I don't know, depending on how
many expenses we have.
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But the question is, what does
he get for that $5 million.
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So in order to come to that
conclusion, you have to
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determine what is what we had
before he came to the picture
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worth, right?
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Notice, when I did this balance
sheet I didn't even
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write what these assets
are worth.
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What is this worth?
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And this value, this is called
a-- well in general, whenever
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you're valuing anything, it's
called a valuation.
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And since we want to know what
this is worth-- this is before
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we got any kind of money from
investors-- this would be
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called a pre-money valuation.
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And I'll show you why that
matters in a second.
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Because, if us and this angel
investor agree that this-- our
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assets before we go to them--
are worth $5 million.
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So if we agree that they're
worth $5 million-- let me draw
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that so, what color was
I doing that in?
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It was in yellow-- so if we
agree-- let me draw it a
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little bit smaller-- essentially
it's just an idea,
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and then we have the shares,
a million shares.
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Of that million,
I have 200,000.
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The other 800,000 are
with my friends.
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These are one million shares
total, or shares outstanding.
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So if this idea-- we agree with
the angel investor-- if
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we agree this is worth
$5 million.
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So everything we have today
is worth $5 million.
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Then when he gives us
another $5 million,
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that's an asset, right?
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We'll have $5 million in cash.
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So he'll give us another
$5 million.
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He'll essentially get
50% of the company.
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He'll get all of these
shares up here.
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Now how does that work out?
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Well if you think about it,
this is the post-money
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company, right?
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So let's think about
it a couple ways.
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This is $5 million.
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That's the idea.
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What is the $5 million worth?
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That's not a trick question.
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That's worth $5 million,
right?
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It's worth $5 million.
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So what is the post-money
valuation?
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When we talk about valuation
we're talking about the value
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of the assets, especially
because we're not dealing with
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any debt right now.
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Everything on the right-hand
side is equity,
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so this is all equity.
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Let me write that, no
liabilities yet.
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And in general, when you're
doing a startup company, if I
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want to start socksonline.com,
and I go into my local bank
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and say, hey give me a
loan, they're just
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going to turn me away.
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Because if you have a venture
that really doesn't exist yet
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and has no cash flow, they know
that you're not going to
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pay the interest on the debt, so
you're not going to even be
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able to raise debt until you
are a more mature company.
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Or until you-- maybe you could
post some collateral.
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And I'll talk more about that.
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Maybe you could say hey,
I'll use my house.
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If I don't pay the debt, you
can take my house, or
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something like that.
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But for the most part we
don't want to do that.
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So the only way to raise money
at this early stage is by
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issuing equity.
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So going back to what we were
talking about, what is the
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post-money valuation?
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We said before any of this stuff
on the top existed, the
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pre-money valuation of just
our idea was $5 million.
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Now, the angel investor, if we
value this at $5 million,
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he'll give us $5 million more.
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What is the total value of
all of the assets now?
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Well if we said this was $5
million, that's just something
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we agreed with.
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This is worth $5 million.
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So the combined assets, if you
believe that this is worth $5
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million, is now $10
million, right?
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And this would be the post-money
valuation.
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And if you think about it, if
you think about the company in
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this form right now, we-- me
and my buddies-- we've
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contributed half of the
value of the company.
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And this rich guy, he's
contributed the other half of
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the company.
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So it makes sense that he
has 50% of the company.
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So how is that going to work?
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Well, I don't give away any of
my shares, and neither are any
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of my friends.
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They're all going to
keep their shares.
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So we had five chunks of
$200,000 that went-- 200,000
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shares that went
to each of us.
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All right, that was buddy
one, two, three, four.
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So what we'll do is, we'll
actually issue another million
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shares and give it to
this rich dude.
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So this is another one
million shares.
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So as the company board, you
can actually authorize to
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create shares.
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And that's what we did, and we
essentially sold those shares
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for $5 million.
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So now instead of having one
million shares, you have two
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million shares.
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So something interesting here,
and some people often talk
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about the notion of
dilution, right?
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Because before, I had 200,000
out of a million shares.
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So before, I had 20%
of the company.
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And now what do I have?
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Well we've essentially doubled
the share count, so now I only
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have 10% of the company.
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So some people say, oh you know
what, my share of the
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company got diluted.
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But it really isn't the case,
because the company has gotten
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all this cash.
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I now own 10% of something
that's twice as valuable, as
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opposed to 20% of something
that's half as valuable.
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If you really believe
that, then this
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was no change, right?
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I now own 10% of ten million,
which in theory should be
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worth a million dollars.
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Before I owned 20% of five
million, which was also worth
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a million dollars.
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So if you believe these
valuations, I
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probably-- I'm neutral.
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And we're going to put this
$5 million to work.
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And actually let me take a
step-- actually no, I just
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realized I'm out of time.
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Let me continue this
in the next video.
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