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המרצה: ד"ר אברהם "אייב" גיל

45 .abegill @yahoo com *** *** . .www asppartners com

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© 1992 – 2014 ASP Partners Dr. Abraham “Abe” Gill – www.asppartners.com

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Capitalization and Valuation issues

1. How to value your company?

2. How to divide the capital?


Present Value calculation based on 3rd Year Profit Projections

To derive a conservative valuation for any companywe can use 3rd year (or nth year) Financial Projections.

First we calculate the Future Value using the nth year pre-tax profit forecast from the Financials, subtract taxes, and multiply the result

by the average P/E of the specific industry. The Present Value can be calculated using the following formula:


Future ValuePresent Value = ------------------------

(1 + j) n

Where j = Required Rate of ReturnWhere n = Number of Years


For Example:

Let us assume that a certain company projects a pre-tax profit of $10,000,000

The Future Value is = to $10,000,000 less the applicable State, Federal and Local Taxes. Assuming these

taxes are about 50% and the average P/E ratio = 10,the Future Value = $10,000,000*(0.5)*10=$50,000,000

Assuming that the New Investors will require a 60% annual compound rate of return or (j = .60),

over a three year period (n = 3) the Present Value can be calculated as follows:


Future ValuePresent Value = ----------------------

(1 + j) n

$50,000,000 $50,000,000Present Value = ----------------- = ------------------

( 1 + .60) 3 4.096

= $12,207,031


Example 2:

Let us assume that a this company will reach a pre-tax profit of $10,000,000 only after 5 years (instead of 3)

The Future Value is = to $10,000,000 less the applicable State, Federal and Local Taxes. Assuming these

taxes are about 50% and the average P/E ratio = 10,the Future Value = $10,000,000*(0.5)*10=$50,000,000

Assuming that the New Investors will require a 60% annual compound rate of return or (j = .60),

over a five year period (n = 5) the Present Value can be calculated as follows:



(1 + j) n

$50,000,000 $50,000,000Present Value = ----------------- = ------------------

( 1 + .60) 5 10.48576

= $4,768,371


Example 3:

Let us assume now that the investors require a 90% annual compound rate of return or (j = .90),

over a five year period (n = 5) the Present Value can be calculated as follows:



(1 + j) n

$50,000,000 $50,000,000Present Value=----------------- = ------------------

( 1 + .90) 5 24.76099

= $2,019,305


Going back to Example 1:

In this example the Present Value was calculated at

$12,207,031

If the company needs $3,000,000 for R&D and Mktg.the Investors can be offered 24.5% of the equity.


Going back to Example 2:

In this example the Present Value was calculated at

$4,768,371

If the company needs $3,000,000 for R&D and Mktg.the Investors will need 62.9% of the equity.


How to divide the capital?What is the Cap. Table?

If we use the figures in Example 1:

The founders should get about 51%The Investors should get 25%Reserve for future employees 15%Reserve for Strategic Partners 9% (Total = 100%)

Obviously, if additional financing will be required, all of the above figures will be diluted accordingly.


Discuss other forms and

ways of Corporate Valuation:1 x Annual Sales (For larger companies)

Net worth (For companies that are Public)

“X” times the Net Cash generated by the company in a particular industry.


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