Keep your personal net worth top of mind at all times, and use it to drive conversations with investors, bankers, and prospective co-founders alike.
By Hemanth Gorur
Personal net worth can be a tricky concept, more so for self entrepreneurs. Based on the legal structure of their company, startup founders and promoters may have to reinterpret their equity holdings to draw up their personal net worth statement.
That said, the concept itself is misunderstood by many to mean “worth of their assets”. That is only partially true since one’s assets need to be reduced by one’s liabilities to arrive at their personal net worth.
Let’s look at the various components of your personal net worth and see how to quickly and easily draw up your personal net worth statement.
Assets, liabilities of an entrepreneur
Draw up your assets and liabilities on either side of a ‘T’. The mathematical difference should give you your personal net worth. Do note that you may have to normalise the value of money over time using concepts like net present value or discounted cash flows so that you are making the right comparisons and mathematical operations.
Assets: While assessing the value of your assets, start your inventory with the basic ones. Consider all immovable assets like land, property, or installed machinery, and remember to apply the market value at the time of inventory.
Next, consider all your movable assets like vehicles, cars, or furniture, and remember to apply depreciation over the purchase cost. Do not forget household appliances like TVs, washing machines, refrigerators, or air-conditioners—everything you have is an asset and everything has salvage value. Assets like gold, jewelry, or commodities have to be valued at their market values, usually given out by the nation’s benchmark exchange pertaining to those assets.
Now, move on to your financial assets like cash, bonds, deposits, government securities, and mutual funds or shares of third party companies, and take their face value or market value. Any loan taken from you or collateral pledged with you by any third party for a monetary value is also an asset. Here, take the unpaid principle plus interest value of the loan or the market value of the collateral.
Finally, consider your own startup’s book value (assuming it’s not a listed company) and your shareholding in that. In case your startup does not have tangible assets and relies more on human capital, estimate your earnings for the next 5 or 10 years and take the net present value. Add the current market value of any owned office space, equipment, or furniture.
Liabilities: Liabilities are simpler to identify and assess. Anything you owe or depletes your resources are liabilities. However, do not include short term liabilities like utility payments, credit card payments, or expected monthly expenses. Consider only long term liabilities like unpaid loans, pledged jewellery or shares, rental deposits received, unresolved tax demand outstanding, charges due upon possession of house property currently under construction, etc.
Net worth: Once you arrive at the two figures above, it’s a simple matter of deducting one from the other. Make sure they are all denominated in the same currency. Conduct this exercise every year or each time there is a major transaction. If your assets outweigh your liabilities and show an increasing trend over time, your financial position is healthy. Otherwise, you need to take immediate and focused action to bring it back on track.
Remember that the above is a quick ready reckoner only and is not a substitute for a professionally crafted net worth statement. Keep your personal net worth top of mind at all times, and use it to drive conversations with investors, bankers, and prospective co-founders alike.
The writer is managing partner,