Unit Economics
The Customer Acquisition Cost (CAC)is the cost to acquire an average customer. If it is significantly lower than how much money you can earn from one customer (Life Time Value), your unit economics will be positive and the company will be more likely to drive a sustainable net profit.
More information can be found on our detailed post here.
The Life Time Value is a prediction how much gross profit a company can generate from an average customer. It essentially applies a perpetuity formula to the gross profit per customer by dividing it with the customer churn rate. If this figure is significantly higher than the cost to acquire such a customer, your unit economics will be positive and the company will be more likely to drive a sustainable net profit.
More information can be found on our detailed post here.
The LTV:CAC ratio, describes the marketing profitability of each customer is. If your LTV:CAC is below 1, you earn less from each customer than it costs you to acquire her. That means no matter how many customers you have you could never be profitable. To build a sustainable business, the LTV:CAC ratio should be substantially positive (at least >3x) so that there is enough money to pay for operations, R&D and business development.
More information can be found on our detailed post on Unit Economics here.
Unit Economics describes the relationship of direct costs and revenues of each unit of sales of a business. If each sales unit generates more revenues than it generates direct costs, there will be gross profit available to pay for the operations of your business. Its a great measure of operational health for fast growing companies: If your unit economics can’t generate a gross profit your company will never be profitable, no matter how many customers you have.
More information can be found on our detailed post here.
Valuation Methods
The Internal Rate of Return (IRR) is the discount rate that makes all the cash flows of a Discounted Cash Flow Analysis (DCF) equal to zero. It can be understood as a startup’s average annual return. Its an overall measure of your startups return potential as it considers every cash flow from investment to growth period and exit, while reflecting time value of money. If your predicted IRR is high enough (>100%), your startup will have a high chance of being fund-able.
More information can be found on our detailed post here.
The Discounted Cash Flow Method predicts a startup’s value by discounting all of its predicted cash flows by a discount rate that is meant to compensate for its riskiness. For this, future cash flows need to be predicted with a detailed financial model and an appropriate risk factor needs to be determined. This renders a high degree of precision in calculating a startups valuation, but also introduces a huge amount of variability due to the many assumptions used.
More information can be found on our detailed post here.
Multiple (or Comparable) Analysis is a metrics based valuation method. It derives a company’s valuation by comparing its key metrics to those of similar companies. With a simple rule of three formula, any startup or mature company can be valued in seconds. The key is to pick the right metric and find appropriate comparable companies.
More information can be found on our detailed post here.
The terminal value can best be understood as the expected sales price of your company at the end of the fast growth period. It is either calculated with a perpetuity formula based on a steady growth rate or by applying an EBITDA multiple.
More information can be found on our detailed post here.
Deal Terms
Liquidation Preference entitles its holder to a preferential payout in a winding-up or sale of a company. It is commonly used as a right to protect investors’ investments in unfavorable payout scenarios. Depending on the terms however, liquidation preference can be extremely beneficial to investors, potentially increasing their payouts by multiples in comparison to actual share ownership.
More information can be found on our detailed post here.
The Right of First Refusal (ROFR) entitles its holder to have a first say on a share sale. For example a company may have a Right of First Refusal on any sale of its shares. If one of its shareholders found a buyer for her shares, then the company has the right to buy those shares at the conditions negotiated with that original buyer.
More information can be found on our detailed post here.
The Drag-Along is a right for a group of shareholders to force all shareholders to sell the entire company. Typically this right is awarded to the majority shareholders so that minority shareholders can’t take exit negotiations hostage.
More information can be found on our detailed post here.
The Tag Along right is the right to “tag-along” on a share sale of an individual shareholder. In a startup fund raise, Investors usually get Tag Along rights to significant share sales of Founders. That means they can sell a pro-rata part of their shares when a Founder wants to sell shares. The idea is: Investors want to protect themselves from being invested in a company where the founder suddenly leaves.
More information can be found on our detailed post here.
The term sheet is a concise, usually non-binding agreement that outlines all major terms of a funding round or exit. It is the first step of formal deal negotiations and it can be initiated by either party: the company, the lead investor or a group of investors. Key terms are the valuation and all value drivers, but also the special rights of investors and basic deal closing procedures.
More information can be found on our detailed post here.
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