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One of the hardest parts of creating a startup is allocating equity. Founders understand that this step is critical. Give away too little and you won’t be able to attract investors. But if give away too much equity you risk losing control. This is a complicated dilemma. Let’s look at some practical ways to make calculating your equity easier.
Valuation Estimator
Before you can start calculating how much equity you have, you need to know how valuable your company is. This can be a challenge for startups, particularly if you are early in your journey. That’s where a valuation estimator comes in. This is a simple online tool. All you need to do is plug in the amount an investor is paying and the amount of equity they are getting. The calculator does the work and tells you how much their stake is worth.
If you want to take things to the next level, these tools can estimate how much their stake will be worth in the future. This doesn’t require psychic skills. Instead, they predict the impact of dilution as the company goes through future funding stages.
Use An Equity Calculator
Equity calculator startup can be powerful tools. There are a few things that they can do. First, they will help you estimate the value of the startup. Lots of factors affect this range. In particular, the stage your company is in. Startups that are earlier in their life have lower valuations. They have to face more obstacles before they will start making money. Because of this, they have a higher risk premium.
The valuation method might vary a little, depending on which calculator you are using. A discounted cash flow (DCF) model is used most of the time. This bases future valuations on the amount of money your company expects to make. For the calculator to work, you’ll also need to estimate the expected return on investment. This is based on how quickly you expect your company to grow.
After you plug in a few details, these calculators will provide you with a huge amount of information. You can see how much your shares will be worth in the future. Knowing this data will let you set realistic goals. You can also see how changes in market conditions will affect your company’s value. You can also model the effect that dilution will have on the valuation.
These tools aren’t just helpful for startup owners. They can also help you land investors. You can show that your company has a bright future. Once they know how lucrative the opportunity could become, investors will be dying to fund your vision.
Using A Spreadsheet
One of the easiest ways of tracking equity is to use a spreadsheet. You can add investors, founders, employees, and other people who have equity in the company. Then, plug in how much equity each person has. This makes it easy to keep track of your shares.
While this method might be useful at the start, it can quickly get unruly. As your business grows, the number of investors and staff rises rapidly. Tracking everything manually from a spreadsheet will become unfeasible. If you want to take this approach, though, you can find free templates online.
Equity Dilution Calculator
This option is ideal for investors. As the startup grows, it will issue new shares. The problem is that this can dilute their ownership stake. Using these calculators, investors can calculate how much they’ll need to invest to reach their target ownership stake.
This can also be good for founders. As new investors and team members come on board, you’ll lose equity. Ideally, though, you’ll retain between 50 to 70% of the shares. This ensures that you’ll retain full control and will be rewarded for your hard work. If your equity levels start dropping, this calculator helps you track how much you’ll need to invest to buy back shares.
Debt To Equity Calculator
Learning about how your equity is divided is only part of the problem. It pays to keep an eye on the overall health of your company. That’s why knowing the debt-to-equity ratio is key. This calculation is fairly simple. You just need to divide the total debt by the amount of shareholder equity you have. You can find online calculators that will do the maths for you.
The ideal debt-to-equity ratio varies, based on how established the business is and the industry you are in. Generally, though, you should keep it below 1.5. Once the debt grows too large investors will get wary about your ability to manage the load properly.
Conclusion
Calculating and tracking equity levels doesn’t need to be difficult. These days, you don’t even need to break out a calculator. All you need to do is find a good equity calculator startup. All of these tools can be found online. Even better, they can all be found for free.
