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Valuation issues with early equity finance

dc.contributor.authorPolimenis, Vasilis
dc.description.abstractThe need to finance startups generates the effect of equity dilution. By dilution we mean the decrease in founders’ ownership of the startup due to the company issuing new equity. An important issue with early equity financing is that a larger number of total shares outstanding has a dilutive effect on the ownership and control of existing shareholders. A critical parameter that determines the magnitude of dilution is the value at which new investors agree to participate, the so called pre-money valuation. As early valuations usually happen with little or no credible financial performance history data, the upshot is a conservative low valuation which aims to protect investors. Unfortunately, if not done properly, such investor protection comes at a substantial cost and control loss to the entrepreneur. One method that to some extent mitigates the risk of such an early low valuation is to finance by convertible bonds. Convertible debt is a hybrid security between common stock and plain vanilla debt, that investors buy with the intention to convert the debt to equity at some later date. The key benefits to consider is that convertible debt financing often avoids some of the difficult valuation issues, and that debt is senior to equity in the event of liquidation. In reality though, for early startups with little or no liquidation value this is not particularly valuableen_UK
dc.publisherNeapolis University Paphosen_UK
dc.relation.ispartofseries1st International Conference on Marketing and entrepreneurship, Neapolis University Paphos (ICME 2018), Conference Proceedings;7-8 December 2018
dc.subjectResearch Subject Categories::SOCIAL SCIENCES::Business and economicsen_UK
dc.subjectValuation issuesen_UK
dc.subjectequity financeen_UK
dc.subjectpre-money valuationen_UK
dc.subjectoutstanding sharesen_UK
dc.titleValuation issues with early equity financeen_UK
dc.typeWorking Paperen_UK

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