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What is at stake for the entrepreneur and the investor with regards to valuation?
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What is at stake for the entrepreneur and the investor with regards to valuation?

Published on 18/08/2022
Contributor(s): Nicolas Roberti de Winghe

Entrepreneur view

The entrepreneur (in its broad definition: families, founders, young start-ups, etc.) usually devotes time and energy to his or her company without counting the cost. The relatively lower annual remuneration is compensated by the hope of long-term value creation through equity participation. Logically, negotiating the valuation of the business can be a rather emotional process as we are dealing with something that is the result of many ‘sacrifices’.

It is obviously expected that the entrepreneur will defend this valuation in which he believes. However, if we could give one piece of advice, it would be as follows: the entrepreneur must at all costs avoid presenting himself to investors with an idea of a valuation that is outside the market. The company excludes itself from certain investors’ radars. A comparison can be made with an overpriced property. The house stays on the market longer and becomes suspect once the price has been normalised: what is wrong with this house that it has not gone yet?

The issue at stake in this valuation, apart from the purely patrimonial aspect, is the control of the company. An increase in capital will lead to an inevitable dilution of the entrepreneur’s position and thus to a partial loss of control of the company. The dilemma so well put by Professor Wasserman takes on its full meaning here: you are either King or Rich.

Investor view

A regular investor is presented with many investment opportunities, which allows him to put the valuations into perspective and thus to have a relative idea of how expensive / well valued the transaction is.

He often takes the valuation for what it is: an attempt to rationalise the value of the company via multiple techniques that lead to different but often convergent results. These have the merit of forming a basis for discussion between the entrepreneur and the investor which should lead to the setting of the price: where demand and supply meet.
The investor will look at two values:

  1. The valuation at entry
  2. The valuation assumptions at exit

Too high an entry value jeopardises his profitability equation

At TheClubDeal

TheClubDeal always aims at maximising the alignment of interests. If a proposed alliance with an entrepreneur falls within our “risk/return” expectation range, we seek to articulate the transaction to align the present and future interests of the partners. The value at which a deal is done and the content of the shareholder agreement are often intimately linked as the shareholder agreement allows certain imbalances to be readjusted via mechanisms such as anti-dilution and relution, or liquidation preference, to name a few.

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