The technical explanation:
At Bootstrapp, we view the “value preserved “”the retention and/or accretion of potential value from the alternative chosen, as compared to other alternatives.” This is typically measured as the amount of equity value, in dollars, that a company’s leadership is able to retain for themselves, employees, and other shareholders instead of needing to sell the equivalent amount of equity-value to equity investors. This value typically grows as one projects into the future, with a strong correlation to the growth in overall enterprise value.
The Plain English Explanation
Think of value preserved as the of opportunity cost. Instead of missing out on something because you didn’t pursue an opportunity, you actually retain, gain, or preserve value within your company because you did not pursue an opportunity. Furthermore, opportunity cost is defined as “the loss of potential gain from other alternatives when one alternative is chosen.” Value Preserved, as we define it, is a type of opportunity benefit - i.e., “the retention and/or accretion of potential value from the alternative chosen, as compared to other alternatives.”
Let’s use an example:
What if you sold 10% of your company today for $1M. That would mean that your company is currently worth $10M. Not bad. Now what if in five years, it’s worth $50M. That same 10% of your company is now worth $5M - and recall that in this scenario you sold it for $1M. Obviously that’s all fine and dandy - an investor took a risk on you and they should be rewarded for it. However, what if you - as a savvy founder - were able to obtain that same $1M that you had originally needed, but split it up and took out $500k in debt, and then only sold 5% of your company for $500k - so that you still ended up with the same capital that you would have had otherwise, but you sold only half of the equity.
At Bootstrapp, we view the “value preserved “”the retention and/or accretion of potential value from the alternative chosen, as compared to other alternatives.” This is typically measured as the amount of equity value, in dollars, that a company’s leadership is able to retain for themselves, employees, and other shareholders instead of needing to sell the equivalent amount of equity-value to equity investors. This value typically grows as one projects into the future, with a strong correlation to the growth in overall enterprise value.
The Plain English Explanation
Think of value preserved as the of opportunity cost. Instead of missing out on something because you didn’t pursue an opportunity, you actually retain, gain, or preserve value within your company because you did not pursue an opportunity. Furthermore, opportunity cost is defined as “the loss of potential gain from other alternatives when one alternative is chosen.” Value Preserved, as we define it, is a type of opportunity benefit - i.e., “the retention and/or accretion of potential value from the alternative chosen, as compared to other alternatives.”
Let’s use an example:
What if you sold 10% of your company today for $1M. That would mean that your company is currently worth $10M. Not bad. Now what if in five years, it’s worth $50M. That same 10% of your company is now worth $5M - and recall that in this scenario you sold it for $1M. Obviously that’s all fine and dandy - an investor took a risk on you and they should be rewarded for it. However, what if you - as a savvy founder - were able to obtain that same $1M that you had originally needed, but split it up and took out $500k in debt, and then only sold 5% of your company for $500k - so that you still ended up with the same capital that you would have had otherwise, but you sold only half of the equity.
Later on, using the same scenario, the 5% of equity that you sold would be worth $2.5M - meaning that the 5% of the company that you DIDN’T sell would also be worth a cool $2.5M. You just preserved $2.5M in equity that you now own instead of the investors owning it. You get to keep that cash during a liquidation event instead of them.
Now obviously, in this scenario, you’ve also taken out debt - and so you’ll be paying interest on that debt as well. So it’s not a perfect comparison. But it’s easy to also calculate the interest payments you’ll be making on the proposed $500k of debt, especially if you have concrete offers from financiers with hard numbers so that you can simply run the math.
And so the next step is easy: you take the $2.5M of equity that you preserved, subtract the interest payments that you’ll need to make as a result of the debt, and voila: You have your “Preserved Value”. Depending on a number of factors, the preserved value can sometimes be in the millions - and many founders simply sell that value to equity investors without giving it a second thought.