Mark Kohler shows why founders mess up valuations: borrowing $100,000 costs you $110,000 in repayment, but selling 50% equity for the same amount values your company at $500,000. Most entrepreneurs overcomplicate deals with promises they can't keep.
How did you come up with that million dollar value? A business has 100% or 100 units of ownership. It's 100%. I own 100% of it. Right now I want 100 grand from Matt. Now I can borrow that 100 grand and I'm going to be on the hook to give him his 110,000 at a certain point in the future, plus points, who knows? Or I can say I'll give you 50% ownership. So if he's going to put in 100 grand, that means 100 units are going to have to have a value. And if he gives me 50% of the company, that means 100,000 is worth 50 units. So now I do the math. It's a $500,000 company. I've got to do the MA, figure out PAR value. So this is where people trying to raise money get into a quandary. They get into this where they start making promises out the butt, promising interest, promising ownership points, or I mean ownership percentages, and it gets super convoluted.
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