In this episode we talk about what you need to know to do quick valuation math like in Shark Tank.
Here's what you need to know to do the quick valuation math in your head from the information that they give you on Shark Tank. So on shark tank, right after a founder is done pitching their product or service. If it's in alignment with one of the sharks, a shark will make that person an offer. And when they're making their offer, they're doing several things. They're communicating how much of the company they want, but more importantly, they're communicating what they believe is the valuation for your company.
So this is a professional investor giving you an evaluation. This is very important because now you have a benchmark for what your company is worth. And here's how you do the math on that. Essentially, let's say that Mark Cuban says he will give you $1 million for 25% of your company. So if you look at the algebra, the algebra is the percentage of your company times. The evaluation equals the amount that he's giving you right, So 25% times V will save Ia's valuation equals $1 million to solve for V. You would take the 25% and divided by what he's offering right so V equals one million over 25%. 25% is 1/4. And if you take the reciprocal of that and multiply it by the offer amount, then you can solve for V. So V equals one million over 1/4. Take the reciprocal four times one million is $4 million. So your evaluation is $4 million. Let's do another one. Let's say that Mark Cuban offers you $1 million for 33.3% of your company, so 33.3% of your company is one-third. So $1 million divided by one-third take the reciprocal of one third $1 million times three evaluation that you're getting is $3 million.
So once you get this information, you might already have an evaluation in your head. Or you might already know and number in your head how much equity you're willing to give to another investor. And based on the information that you have and the information that you're getting, you could analyze whether it's a good decision or not to go through with one of the sharks offers. So let's say that Mark Cuban offers you 25% for the okay, I'll give you $1 million for 25% of your company.
So you're saying a $4 million evaluation If you believe that the valuation is much higher then you can argue that. And you could say no. I'm sorry, Mark. I'll take your $1 million but you're only going to get 12.5% of your company. So what you're saying is your company's worth $8 million On the flip side, if you think the valuation is right, but you think that Mark Cuban is taking way too much, then you can start moving with the percentages, or how much you're willing to how much equity you're willing to give out. So the quick math, essentially percentage times evaluation, equals the offer amount that they're giving you. And if you want to find the valuation of the company, V equals the offer amount divided by the percentage. And hopefully, you guys can practice that and get really good at it. So while you're watching Shark Tank, you can do quick valuations in your head, and I will see you guys in the next episode.
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