Online presentation to the Vancouver Startup Week (VSW) 2020 |
September 28, 2020 |
Virtual (all-remote) companies sell for more money when the company exits compared to conventional bricks & mortar technology companies. And virtual company founders take home more of the proceeds. It may seem counter-intuitive that a company that exists only online with everyone working remotely could be worth more than a comparable bricks & mortar company with a visual presence.
But consider that virtual companies are easily established, efficiently financed, and quickly scaled; attract the best worldwide talent despite geographic boundaries; and have significantly lower costs. This makes them more valuable to Buyers. With lower costs, there is less need to finance to scale which reduces dilution to founders so they keep more of the exit proceeds.
We introduce the Founders’ Retention Formula:
FR = (EBITDA * Multiple – LP) * F * (1-T) – EC where
FR – Founders’ Retention is the amount of money the Founders take home when they sell their company
EBITDA – normalized Earnings Before Interest, Taxes, Depreciation, Amortization and other non-cash charges to the Income Statement
Multiple – the buyer determines the EBITDA multiple based primarily on the growth rate and also includes other quantitative and qualitative considerations
EBITDA * multiple is the price the buyer pays to acquire the company
LP – Liquidation Preference is the amount that a Venture Capital investor takes off the top before the proceeds are shared with the other shareholders.
F – the percentage of the equity held by the Founders
T – the tax rate in percent paid to the taxation authorities on sale of the company
EC – the exit costs to close the exit transaction paid by the Founders.
We also review the acquisition of a virtual company which recently sold for over $100 million in under 60 days.