The article discusses one of the most common methods for calculating the minimum share of an investor in a project. The use of this technique will allow specialists working in the field of innovation to effectively and efficiently carry out calculations in preparation for investing in innovative projects. The author tried to give not just a working algorithm, but also to explain the principles of its use in a volume sufficient both for practical application and for understanding the basics of the methodology itself.

Probably, one of the most difficult and emotional issues in negotiations between project initiators and potential investors is the discussion of the size of the share in the project that the company is ready to provide to the investor in exchange for the necessary financing. On both sides, very, very often there are completely unrealistic wishes about the size of their own participation in the business, while the share in the project for the other side is deliberately underestimated by default. Tellingly, the irony of fate is that often none (!) of the parties involved in the negotiation process has no idea how to practically evaluate the investor's share in the project, relying not on their own, often very vague and one-sided, a vision of "the justice of this world", but on generally accepted methods of calculation. In this regard, having encountered the problem of determining the equity participation of an investor more than once in the course of providing consulting services for assessing the commercial potential of innovative projects, the author would like to contribute to clarifying this issue, which is undoubtedly important for all parties involved in innovative activities. .

Address to readers
To begin with, of course, novice business angels and venture capitalists should read this article, since for them, as for potential investors, the correct assessment of their own equity participation in a project is one of the foundations of professional success. In addition, the methodology outlined in this article will be useful to project initiators and company owners planning to attract third-party investors to participate in the business, since it is critically important for them, as for current or future business owners, to have an understanding of the size and validity of the size of the share, which the investor wants to receive in the project. Another of the parties interested in gaining knowledge about the methods for determining equity participation in a project can be specialists from consulting organizations engaged in attracting investment in innovative projects, as well as innovation managers and university students/graduate students studying in the field of "Innovation activity".

Restrictions
The author would not like the calculation results obtained when using the method of assessing the investor's equity participation in the project considered in the article to be considered as the only true and absolutely infallible truth, since:

The methodology discussed is just one of many others used by business angels, venture capitalists and other investors to determine their minimum equity participation in a project.
* In a journal publication, it is not possible to describe in detail all the prerequisites, on the basis of which an investor chooses a method for evaluating a company and assesses the prospects for a particular transaction, therefore it is quite possible that in practice those who read this article may encounter other methods of evaluating and valuing a company, and the size of the investor's share in the project.

This article does not address the issue of the size of the equity participation of the parties from the point of view of the legal protection of their own interests and the possibility of influencing business management; if you wish, you can familiarize yourself with the legislation on this subject on your own or, preferably, consult a qualified lawyer.
Using this technique allows you to get the size of the minimum possible share of the investor in the project in terms of taking into account his financial interests. In practice, of course, in the process of bargaining for equity participation, any sane investor will try to maximize the size of his share in the project in order to maximize the possible profit.
It should also be taken into account that in many cases (including this one), even when using the same methodology, both the owners of the company and the potential investor can get different calculation results from each other. In particular, this may occur due to the fact that the investor and project initiators may have different views regarding the choice and feasibility of the initial data on which the calculation is based. Let us explain the last idea with specific examples. In the above methodology, in the process of calculating the value of the company, the method of multipliers (numerical coefficients) is used, while the specific numerical value of the multiplier can be chosen differently, based not only on industry practice, but also on the own interests of the investor and project initiators, their experience and vision each conch

retnoy situation. Another stumbling block may be the future operating performance indicators planned by the company, the value of which directly affects both the company's valuation and, accordingly, the size of the share offered to the investor. Alas, in many cases, it was the unreasonable optimism of the company's initiators regarding future profits and, accordingly, the overestimation of the business obtained on the basis of these unrealistic indicators, that forced the investor to refuse possible cooperation.

For ease of use, the sequence of actions for assessing the minimum investor's share in the project is presented in the form of an algorithm consisting of three blocks:

Block No. 1. Formation of initial data for calculation

1.1. Investor's internal rate of return.

1.2. The period after which the investor plans to withdraw from the project.

1.3. The amount of investment required for the company.

1.4. Calculation of the return on investment that the investor wants to receive.

Block number 2. Determination of the value of the company at the time of the investor's exit from the project

2.1. Choice of company valuation method.

2.2. Choosing an industry multiplier to evaluate the company.

2.3. Determination of the second multiplier for assessing the value of the company (EBIDTA, net profit, turnover, other).

2.4. Determining the value of the company.

Block number 3. Calculation of the investor's share in the project.

Block No. 1. Formation of initial data for calculation.
At the first stage, it is necessary to accept the initial settings, on the basis of which the profitability of the transaction for the investor is calculated. As initial data for calculations, we need:

1.1. The internal rate of return of the investor (planned rate of return that suits the investor).
As an indicator of the rate of return, the IRR rate (internal rate of return) is used. This indicator for each investor is a predetermined value, which is used to select projects for investment, and all other calculations related to the assessment of the prospects for the investor's participation in the project. Among other things, the convenience of using IRR as a criterion is that the investor always has an idea of ​​its minimum size, since in the practice of investment activity this indicator is one of the basic criteria for selecting projects. It should be noted that each investor chooses the rate of return based on their own preferences. As a rule, for a venture fund, this indicator ranges from 50 to 70% per annum and is determined by each organization independently, based on its own interests, experience and field of activity. At the same time, most venture funds publish the minimum rate of return on their websites in sections containing requirements for projects for investment. In our example, for calculations, we take the IRR rate equal to 60% per annum. For a novice investor, when choosing the size of the rate of return, it can be recommended to focus on rates that correspond to the average market rates for projects in this industry and stage of development. In turn, the project initiators wishing to evaluate the possible equity participation of the investor in the project can receive the rate of return, which each specific investor is guided by, directly in the course of bilateral negotiations with this investor. In general, the issue of choosing an acceptable rate of return for an investor can be quite ambiguous and require additional consultations with specialists, however, for the purposes of this article, we accept the rate as a predetermined value.

1.2. The period after which the investor plans to withdraw from the project.
The principles of business angel and venture investment assume that the investor initially invests for a certain limited period, after which the investor's share in the company will be sold to them (the so-called "exit" from the project). At the same time, it should be taken into account that the choice of the time point after which the investor plans to sell his share in the project, having fixed the profit received, will seriously affect the results of calculations in the future. The planned duration of the investor's stay in the project depends on various factors, in particular, on the stage of development of the project and on the investor's plans to work with this project in the future. As a rule, a business angel takes for calculations a period of stay in a project equal to 3 years, a venture investor sets a target planning horizon for himself in the range from 3 to 5 years. For the purposes of this example, we assume that the VC will exit the project after 5 years. As a rule, when calculating, most venture funds use this value.

1.3. The amount of investment required for the company.
On the part of the project initiators, it is necessary to determine how much investment is required from the investor to implement the project. In this article, when calculating, we take the amount of investment equal to 50 million rubles. Stepping aside a little, I would like to make a few

There are a few comments for project initiators regarding the preparation of a proposal for an investor.

First: In this regard, it is important to understand that in a situation of attracting investments, the project initiators are, in fact, sellers offering the investor to buy a stake in the project in exchange for a certain amount of investment. At the same time, the need to form a clear and unambiguous initial offer for the investor lies with the sellers, and not at all with the investor acting as a buyer.

Second: If you, as the initiators of the project, have several business development scenarios that differ in the required investment volumes, then for the initial presentation of the project to the investor, you need to choose only one of them that is most suitable for the requirements of this particular investor.

Third: Avoid ambiguity in numbers. The world of finance and business does not accept posing a question in the style of "in agreement with the investor and depending on the development of the situation, the project will require from $100,000 to $10,000,000 of investment." In general, as a final piece of advice, it should be noted that an attempt to send an investor an unformed investment proposal is doomed to failure in terms of attracting investments.

1.4. Calculation of the return on investment that the investor wants to receive. The next block is to determine the amount of money that the investor would like to receive upon the sale of his share in the project. To obtain this amount, the formula for increasing cash flow is used (1)

FV = PV * (1 + R)n (1)

where:

- FV (Future Value) - income (return on investment), which the investor plans to receive after n years of being in the project

- PV (Present Value) - in our case, this is 50 million rubles, the investment that the investor invests in the project

- R - the rate of return adopted in our case (see paragraph 1.1.) equal to 60%

- n - the number of years after which the investor plans to exit the project, having received the desired profit, in our case, we assumed that the investor plans to exit the project in 5 years (see paragraph 1.2.)

Substitute the data in the formula and perform the necessary calculations:

FV \u003d 50,000,000 * (1 + 0.6) 5 \u003d 50,000,000 * 10.4858 \u003d 524,290,000 rubles.

Thus, it turns out that 5 years after the sale of a share in the company, the investor wants to receive 524,290,000 rubles.

Block number 2. Determination of the value of the company at the time of the investor's exit from the project
2.1. Choice of company valuation method.
Business angels and venture capital investors use various methods to assess the value of a company, but in this article we will consider only one of them, i.e. multiplier method. In principle, if desired, in block No. 2, instead of the “multiplier method”, you can use another method of estimating the value of the company, however, in any case, the parties to the transaction will still need to agree on the use of a certain valuation method and the details of the calculation methodology.

It is important to note that when evaluating a project by a venture investor, the company's value is determined at the time the investor leaves the company and, accordingly, all planned indicators of the company should also be taken at the time the investor leaves the project.

When using the "multiplier method", the company's value is determined as the product of two factors, one of which will be a certain numerical coefficient adopted in accordance with the specifics of the industry and the project, and the second may be one of the following indicators of the company's operating activities:

a. net profit

b. EBIDTA (Analytical measure equal to earnings before interest, taxes and depreciation)

c. volume of sales

In some cases, other business indicators are also used as a second multiplier. For example, from business practice, the approximate value of a bank can be determined based on the size of its capital, multiplied by a numerical multiplier, adopted depending on the market situation at the time of assessment. It should be borne in mind that the "multiplier method" can give a significant error and using it you can only get an approximate assessment of the business. For our example, we assume that the calculation of the company's value will be made according to the formula: The company's value is equal to the product of net profit for the 5th year of the project development by a numerical multiplier, the value of which we will determine in paragraph 2.2. below.

2.2. Choosing an industry multiplier to evaluate the company.
In general, the choice of this numerical multiplier is due to a fairly large number of factors, for example:

– the market situation in the investment sphere at the time of the company's valuation;

- the specifics of the industry;

- the size of the discount / premium that the investor wants to receive / provide, provided that the project has certain minuses / pluses.

If it is difficult to choose a multiplier, the initiators of the project or the investor are advised to contact specialists in the innovation field with the necessary experience.

In our example, the industry multiplier is taken equal to "5".

2.3. Definition

the second multiplier to assess the value of the company.
In our example, we will use the net profit for the fifth year of the project as the second multiplier. As a rule, the investor receives the planned indicators of operating activity in finished form from the business plan developed and provided by the company. For our case, we assume that the company's net profit for the 5th year of existence in accordance with the business plan is planned in the amount of 300 million rubles.

2.4. Determining the value of the company.
In accordance with the methodology adopted by us earlier (clause 2.1.), the value of the company at the time of the investor's withdrawal from the project will be determined as the product of net profit by a numerical coefficient of 5, or:

Company value per year = 300,000,000 * 5 = 1,500,000,000 rubles.

Block number 3. Calculation of the investor's share in the project.
The calculation of the investor's share in the project is carried out based on the following simple formula:

Investor share = required return on investment (year 5) / company value (year 5),

or, going to the numbers:

Investor's share = 524,290,000 / 1,500,000,000 = 0.3495 - 35%

The author advises understanding that each of the parties may have basic principles of equity participation in the project, without which cooperation will be impossible.

25% + 1 share for a company established in the legal form of a joint stock company;

50% +1 share for a company established in the legal form of a limited liability company. And finally, one more important advice for the initiators of innovative projects. Before attracting an investor to the company, first try to find out the assessment of your business from several potential investors. This is especially important if you think that a potential investor, venture capital fund or business angel is offering an unreasonably low price for a share in your company. In this case, an independent assessment of the project, received from several potential buyers, will allow you to understand the real value of your business and, if necessary, adjust your negotiating position in one direction or another. We wish you success in your innovative business!