8. Have you determined the post effective capitalization of the shell?

This is probably one of the most important decisions you will make as CEO of a public company. How exactly do you value your company? The value you place on your company will determine how you capitalize the company. In other words, it affects how many shares you will issue and at what price.

If you are in an industry sector that has several public companies listed, you can use the PE multiples of those companies as a starting point. You can take the average of the PE ratios and take a discount to that average number. For example if the average PE is 20 you could value your company at a 50% discount or a 10 PE. There are many variables to consider. Is your company a “start up” or is it established? What are your revenues and growth potential? Are you profitable? All of these questions play an important part in your analysis of the valuation of your company.

You also have to consider capital raises. Is the valuation of your company based on “pre-funding” or “post-funding”? For example, if your company has a valuation on a pre-funding basis of $20 million and you need to raise $10 million you will be giving up 33% of the company. If, however, your company is valued at $20 million on a post funding basis and you raise $10 million you will be giving up 50% of the company.

If you want your stock to be capitalized at $1.00 per share then if your valuation is $20 million you will issue a grand total of 20 million shares. Many company owners have dreams of starting their stock price at $5.00 per share, but it is much easier to start at $1.00 a share and work your way up than start at $5.00 where there is a high likelihood that your stock will attract short sellers who will try to hammer your stock. If you have a very tight float short sellers will most likely stay away from your stock.

The valuation of your company and the amount of money you need to raise must coexist in such a manner that makes sense for you, the CEO. A company that has a pre-money valuation of $10 million and needs to raise a first round of funding of $40 million to execute its business plan does not leave much leftover for existing management. You will have given up 80% of the stock and control of the company.

Needless to say, figuring out how to value your company can be a daunting task. It is always wise to seek an experienced consultant who knows the “lay of the land” when it comes to these matters. Should you wish to gain additional information regarding purchasing a shell please feel free to contact me at Ralph@ventanacapitalpartners.com.

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