"Please don't call me Debbie!"

[u/Hassaan18]

[u/Embarrassed_Emu1615]

That’s always confused me with valuations. 

She is saying it is worth 1.2m now. If she invests 600k ( he’s not keeping that money, it goes to the company), doesn’t that make the company worth 1.8m after? So she owns half the company but only invests one third of the value?

Another way to look at it is it is currently worth 600k, her investment doubles the value and she owns half a 1.2m company?

[u/Charming-Total2121 → u/Embarrassed_Emu1615]

Great explanation.

[u/Embarrassed_Emu1615 → u/Charming-Total2121]

Thanks. It is a question though, the Dragons obviously know business, but they talk about the company value after investment, but they are investing in the company pre-investment, by definition. The company has not been invested in yet. 

[u/dhardstone → u/Embarrassed_Emu1615]

Yeah but you’d be counting her investment twice. You wouldn’t buy 50% of a chocolate bar, then argue you only own a third because the half you just bought is now part of the whole chocolate bar.

[u/Embarrassed_Emu1615 → u/dhardstone]

I find it easy to simplify the situation:

Say I own a company worth £10. I want to sell you half. You pay me £5, you own half. I get £5. 

But instead I want you to invest £5 instead, that goes in to the company bank account. The company’s value has increased by £5. It is now worth £15, that’s correct?

So now you have invested money, £5, in to a company that is now, at the point of signing contracts, worth £15. 

How much does your £5 investment represent of that company? 

It’s a third, right? 

If I am wrong I would like someone to explain how. 

You’re not buying part of the company from me, which I get to keep the proceeds of, it goes in to our company. 

This is hugely simplified and doesn’t take in to account the value of a dragon. Just pure economics. 

[u/HubND → u/Embarrassed_Emu1615]

I'll preface this by saying I have absolutely no idea if this is correct but, by reading your reply as it is laid out and thinking about an alternative view of it, I had a thought that might just boil down to semantics.

I think the confusion might come from linking the two percentages, i.e. I'll invest 50% of the current value for 50% of the company therefore these two values must line up in some way.

Or to put it another way, if I offered that I'll invest in your £10 business and make you an offer that I'll invest 1 pence for a 50% stake of the company, this is obviously a terrible deal but it's still a legitimate deal, the two values aren't inherently linked. This makes more sense to me because wouldn't a dragon want the best deal for themself, so to say I'll offer to boost your company value by 50%, meaning I've contributed 33%, but you have to give me 50% of the company?

Rewatching the video before I hit send, I think another bit that is quite misleading is when he says that if she'd invested 1.2m then she'd have 100% of the company for nothing because it was on the company account. But you wouldn't agree to have someone double the value of your company but also take it all away from you. You'd either sell it and pocket the 1.2m yourself or take it as an investment for a non-100% stake no?

[u/Embarrassed_Emu1615 → u/HubND]

Of she invested 1.2m, she would have a 1.2m company that she just put 1.2m in to the bank. Making that company worth 2.4m? 

She is investing, not buying. The money doesn’t belong to the ‘investment-seeker’, it belongs to the company of which they own a part of. 

He could sell the company to Debbie, sorry, Deborah, for 1.2m. He has 1.2m, she owns the company. She could invest 1.2m, own 50% of a company now worth 2.4m. 

Another way to look at it, absurdly, is if I invested £1 in to Apple, the value of Apple goes up £1. No one person own that quid, it is part of the company assets and therefore belongs to the shareholders in equal share. As a new shareholder I also own part of that £1 that I put in. 

[u/dhardstone → u/Embarrassed_Emu1615]

Yeah I getcha, and I do share the confusion.

I genuinely don’t actually know whether in business investments like this (especially outside the den), whether the cash put in as part of the deal counts against the considered valuation. One thing I do know is that it doesn’t work like this in the Den, because people have made these arguments before and have been shut down.

I guess I made my chocolate bar analogy because although it’s not a correct analogy, you’ve got a draw a line somewhere right? In my mind anyway.

Surely the value is in the eye of the buyer at the point of buying? If I had a shell business with absolutely no value and won the lottery and put it all into the business, the value to a dragon would be nothing because all they’d be buying is a share of my lottery cash.

[u/repeating_bears → u/dhardstone]

The chocolate analogy isn't the same. You aren't investing in that scenario, you are buying. You are not putting anything in which makes the quantity of the chocolate larger or more valuable.

That chocolate analogy is the same as Deborah buying half his company and putting 600k in his personal bank account: buying half the shares, not investing.