Now for the financing, you have to also tell your investor your valuation. A lot of start-up entrepreneurs find this extremely difficult. Because for company that has not yet have a revenue or product, how can you name the price? Well, it is difficult indeed and I would say, this is more like an art than science. Now of course, we could try the traditional ways. I mean, some people try and it's not a bad idea to use them as a triangulation. What are the traditional way of doing pricing for evaluation? Well, you can use, for example, discounted cash flow. It is very useful for a company that already has revenue and even reach a steady state. So, they have a lot of meaningful financials and meaningful free cash flow to speak of. You could do that for the start-up, but the numbers are probably hardly believable. You could use reference transaction. You could benchmark another investment in the market. And so, investors and the company is in a similar situation of yours. Maybe the other company in the overseas country, maybe there's a slight different stage, but you can use that as a reference to benchmark. And say, if I can execute this company and I can get this much revenue or this many customers, then I should be worth so much as well. That's another way of doing it. And if your business has a lot of individual customers, then you count your customers and you can roughly say, how much is each customer worth? And if you multiply that by the number of customers that you project to have and that's your type of company. This method typically applies to, for example, mobile operator where each customer's payer subscription customer. And so, you can multiply the number of users. Now there are many, many, many ways. However, none of the answers are correct, of course. They are all estimates, but they serve as a good starting point to talk to your investors. Let me share a little story with you. I have co-invested with someone on a start-up. We were discussing whether the start-up should be evaluation of let's say, 2 million or should it be 1.5 million or should it be even lower, 1 million as the valuation. In the end, after a lengthy discussion amongst the coinvestors We come to a conclusion that it really didn't matter and here is the reason why. Since I'm the investor of that company, of course, it has already passed a lot of the check boxes. The team is good, we think the idea is good, You know all check out. So if the team is that good, I believe that team is going to make this company great. So at some stage, I hope the team will make this company into a unicorn which is a company of valuation of more than 1 billion US dollar. If you think about it, if the team can create value and make the company into such a big and valuable company, if it's a billion dollar or even more, what does it really matter if at the very beginning, the valuation is 1.5 million or 2 millions? Certainly if you look at the big picture, it doesn't really matter. Will it give you 50 times return or will it give you a 75 return, or even a 100 times return? Does it really matter that much? The answer is not really. So, should it be 1.5 million valuation or 2 million valuation? It doesn't really matter. So, don't over kill yourself with the valuation. Now however, of course, the numbers that we mentioned, they were already in very close range. Same order of magnitude. If your investors cannot agree with you in terms of an order of magnitude, then you have big problem. If it's just minor kind of adjustment, then it doesn't really matter at the end of the day. What matters is make that company great. Create a unicorn and beyond. So pricing of the, I mean, the price tag of your company, the valuation is really an art. There's no right or wrong answer and you can try all the traditional ways, and none of the numbers are the correct one anyway. So, it's what you can agree with the investor. Now having had the valuation and the investment that you're asking from the company, that will automatically translate into how much shares the new investor is going to get. So, how big of the pie they are getting from your company? There's no right or wrong answer again, but what's important is do you still have enough upside to incentivize yourself, to motivate yourself? I have talked to a friend who's a successful entrepreneur and here is what he share with me, and this is the roadmap or the journey that any entrepreneur will go through. Well, he said to me, when you run a start-up even for a number of years, you will encounter a lot of ups and downs during the start-up era. In fact, mostly down, very few ups in the journey and he told me what really kept him going each time when the start-up has a low point. He said, well, this is my company. I'm responsible for the company and I'm taking full responsibility. Remember, at the very beginning of the module one, we talked about entrepreneurs are the one who take full responsibility of the company. And for this fact, because he's still the very much majority owner. And so, the upside for him is still very great. That's how he will actually whether through the low point. Now imagine, if the investor comes in and already taken the majority of your company, you as the entrepreneur and the founders become minority in your company. Let's take an extreme example. They come in and take away 70% of your company, and you and your co-founders maybe each of you have 10-15% of the company. How would you feel? Because in the next round, you're going to be diluted, probably further down into 5% or less. How would you feel when next time the company hit a low point? Well, because now you are like an employee with stock option, you no longer capture the upside of the company and you probably getting a pay check like an employee. So I can guarantee you, this is when you will think about quitting when the company hit their low point next time. We are only human. Psychologically, it's very hard to convince yourself to storm through the bad times when you no longer have the up side. Now, I'm not saying that you should never ever give up majority to the investor. I'm simply telling you do not give up too much equity too early, because it will completely kill your incentive and your upsides. And therefore, it is very, very hard for you to actually get over the low point. Just a word of warning. Now to be fair, if the investors really need to give you a large amount of money and your evaluation really can not justify a high number, fair is fair, then the investor should get a lot of shares from your company. That's also okay in those circumstances. So you have to think about the valuation, which will directly affect the company that you going to run and the size of the pie that your investor will take from you.
