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I need advice on a fund raising scenario with a start up i am currently helping out.

Here is the catch:
This new start up is an new idea founded out of an existing company that is already funded. This existing start up's original investors wants to claim 55% of this new Start Up but has only put $ 100 000 in cash to get it through prototyping, consulting and hiring two developers for its MVP.

This new start up requires around $ 1 mil to go to market, it is offering 10% equity which effectively values the business at $ 10 mil.

Question: With the existing shareholders wanting to claim 55% for investing $ 100 000, and the real funding requirements of $ 1mil, how does this effect the companies valuation?

I am willing to have a 5 min call on this asap with the best possible person who can help me sum this up

Business Valuation

Tom Williams answered

I can tell you that this proposed structure will significantly reduce NewCo's ability to raise additional capital. The idea too that the startup's valuation can jump from less than $200,000 to $10m just through the creation of an MVP in a relatively short period of time is also unrealistic. If the investors actually want their investment to succeed, the absolute maximum they should be getting for a $100,000 would be 15%. If there is a tangible asset (not just an idea but a patent, a customer list, whatever), this could also be worth some equity but generally not more than 5%. If they believe that this NewCo is worth investing $100,000, they should want to invest this $100,000 in the best possible way as to attract further outside capital, not structure it such that the deal is immediately toxic to new investors, day one.

Happy to talk through this in a call.

Dr. Shishir Gupta answered

I can help you for sure. Feel free to setup a call.