When a small business goes through the process of raising money from investors, it’s far from painless. It is one of the most stressful events in the growth of a company. If the owners aren’t prepared for what fundraising entails, they run the risk of losing control of the company they are fighting so hard to grow. In many cases, it could lead to the complete disintegration of the professional and personal relationships among the owners that allowed them to succeed in the first place.
The importance of scenario analysis
Scenario analysis is the center piece of preparing for any fundraising effort. Through this process, owners create multiple “what if” cases with respect to the amount, type and nature of investment. The main goal is understanding how accepting different amounts of money in different ways will impact the ownership stake (and hence the control) of the original owners. There are different ways to build scenarios. Excel spreadsheets are the most common. But another way – which I find very helpful – is to use the Equity Simulator.
The Equity Simulator explained
The Equity Simulator is a free tool developed by Own Your Venture which advises entrepreneurs and early stage companies. The tool, available on their website, offers a user-friendly way to analyze how various deal terms impact the ownership of the company. On the left side of the screen you have the “input” fields. The center of screen shows a graphical representation of your results. The right column shows your “output” or results.
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What data do you need to use?
Current ownership structure
This simply refers to who the owners are and what percentage of the equity is owned by each one. You don’t have to use names, just initials if you are concerned about putting any identifying information on the website.
Number of rounds
In most cases of scenario analysis, owners create robust scenarios for the current transaction but fail to take into account the impact of future rounds of funding. This oversight is understandable. Trying to raise money and run your company successfully can keep even the most proficient multi-tasker busy.
The equity simulator takes you through up to three rounds of funding, showing the cumulative results on the ownership stake of the original founders.
Go to the article: Use the Equity Simulator When Raising Money
