Please can someone explain to me what ‘discount rate’ is when angel investing?
For example, $6,000,000 business valuation, discount rate is 85%, with an investment of $16,000.
In: Other
company evaluation x discount rate = effective company evaluation
(6,000,000 x 85%) = 5,100,000
investment / effective evaluation = ownership
16,000 / 5,100000 = 0.31% ownership
they do this to compensate for the risks
The angel investor gets a premium by investing early. The valuation is discounted for their purchase.
85% of $6,000,000 is $5,100,000
$16,000 as a fraction of $5,100,000 is 0.00313725490196078431372549019608 or about 0.314%
Buying 0.314% of a $6,000,000 company should have cost $18,840 with no discount.
16,000/18,840 is practically 85% also.
There are lots of tiny rounding errors in these.
Latest Answers