IRR calculations

searcher profile

February 13, 2024

by a searcher from Brown University in Dublin, Ireland

Dear All,
I need your help and support.

How do you calculate the IRR for the searchers' equity?
1- I've calculated it including the annual cash flow generated by the compan
2- Consider solely the initial investment and subsequent returns to investors.

Let me know which way is the right way.
I really appreciate your support

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commentor profile
Reply by an investor
from University of Southern California in Boston, MA, USA
Are you planning to distribute the cashflows to equity holders before exit? If so, count them as part of the IRR. If you're planning to reinvest the cashflows for future growth (the more common scenario), then don't count them in the IRR as they eventually get "counted" via that (hopefully) larger exit number.

For your own personal equity calculation, I suppose you could add to the IRR any annual salary/cashflow above what you would have expected in your prior career. Likewise, reduce the IRR if you're making less now than you were. This might help you account for opportunity cost of making the leap.

IRR gets a little tricky to pin down for a searcher who who take outside equity and get equity granted as part of the deal, as your return at exit is less connected to your initial investment and more to the grant/earn-in.
commentor profile
Reply by a searcher
from University of Tennessee in Nashville, TN, USA
IRR and XIRR formulas in Excel are the most widely used tools for calculations. Regardless, to calculate the IRR for each investor class (preferred, investor common, searcher common, etc.), the cash outflows and inflows DIRECTLY and ONLY to the respective party are used. All other cash flows (to other investor classes, company-retained cash, etc.) are excluded from the calculation. Assuming a calculation is inclusive of a sale, generally the cash-on-hand and the excess proceeds to a transaction revert to the equity holders and would also be included in the IRR calculation.
commentor profile
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