Q: Can you please explain how equity assumptions are entered into the Pro-Forma Model?
A: The Pro-Forma Model allows you to enter equity assumptions – from founder's shares to options to the typical stages of venture capital – and automatically builds and calculates a high-level Capitalization and Ownership Table as well as an Investor Return Analysis on the Summary Report.
The model allows you to enter the following equity assumptions as follows:
Founder’s equity – the number of founder’s shares for all founders combined
Pre-seed employee options – the number of all options that are granted as part of the “pre-money” valuation prior to a seed round of common equity
Seed/Angel investment – the amount of common equity investment and number of shares sold (you can enter up to three different seed rounds)
Convertible Debt - enter a convertible debt investment that automatically converts into the Series A round (see below for more details).
Post-seed employee options – the number of all options that are granted after a seed round which would dilute the seed round investors
Venture Capital Series A investment – the amount of preferred equity investment and number of shares sold and the liquidation preference multiple (the liquidation preference is automatically calculated for you in the waterfall on the Summary report)
Post-Series A employee options – the number of all options that are granted after a Series A venture capital round which would dilute the investors
Venture Capital Series B investment – the amount of preferred equity investment and number of shares sold and the liquidation preference multiple (the liquidation preference is automatically calculated for you in the waterfall on the Summary report)
Post-Series B employee options – the number of all options that are granted after a Series A venture capital round which would dilute the investors
Exit Multiple Type and Amount – in order to calculate the return analysis and waterfall, the type of exit multiple expected (Revenue or EBITDA) is selected as well as the anticipated amount of that multiple. The model will then automatically model the Enterprise Value, Equity Value, and the waterfall for the two classes of equity (Common and Preferred) as well as the management team consisting of the founders and optionees
The model is very powerful, but the inputs are quick and simple as shown below:
Note that you can also enter debt assumptions in the separate Debt section if you anticipate using debt capitalization as well (more on debt assumptions below).
Entering Convertible Debt Assumptions
Many tech startups in the U.S. raise seed capital through convertible debt. Because of the popularity of this type of venture capital investment, we built a convertible debt investment with all of its complexity into our app and greatly simplified it for you. All you have to do is enter the typical convertible debt terms in our easy-to-follow input form and your business plan financial model and all of its accompanying financial statements, financial ratios, cap table, pitch deck financial summary, investor return analysis, and any downloaded spreadsheets and worksheets will properly reflect everything.
Here's the input form: Note the inputs for all key convertible debt terms, such as Investment/Principal Amount, Annual Interest Rate, Disposition of the Interest Due at Conversion (paid in cash or rolled into the Series A), Conversion Discount, and/or Conversion Cap.
If you are using a SAFE (Standard Agreement for Future Equity), enter this as a Convertible Note with a 0% interest rate.
Companies are typically valued based on a Revenue multiple or EBITDA multiple, depending on the industry. This multiple will be used to calculate the investment return analysis. Research the types of exits in the industry for your business model to discern which type of valuation was used. If in doubt, we suggest an EBITDA-based multiple.
A Revenue multiple is more typical for early-stage SaaS or App businesses, while an EBITDA multiple is most typical for any more mature business models.
The actual multiple also varies significantly by industry, so it should be based upon market comparables and expressed as a multiple such as 7.0x.
Most Revenue-based multiples will be between 1x - 4x, but can be higher. Most EBITDA-based multiples will be between 4x - 10x, but can be higher as well. To arrive at the most accurate valuation estimate, research comparables for your type of business. It's better to err on the lower side when entering this value so that you stay in realistic territory when discussing with potential investors.
The debt assumptions inputs are fairly simple. You can enter up to five tranches of debt, with the appropriate down payment percentage, interest rate, and number of months for all of them.