Everyone has a net worth and it can add up quickly.
In the most simplest terms that anyone can understand, you calculate your networth by adding up the value of all your assets “possessions… what you could get for them” and deduct the liabilities “debts”.
Assets = $180,000
1) Your car is payed off and you can easily get $10,000 for it on Craigslist.
2) You have $20,000 saved in the bank
3) Your home is worth $150,000 and is halfway paid off.
Liabilities = $80,000
1) You have $5,000 in credit card bills
2) You owe $75,000 on your mortgage
Net Worth = $100,000
Company Valuation “most industries”:
Under $100k /yr in profit: 1x Annual Profits
$100k-$250k /yr in profit: 2x Annual Profits
$250k-$500k /yr in profit: 3x Annual Profits
$500k-$1m /yr in profit: 5x Annual Profits
$1m+ /yr in profit: 5x-30x Annual Profits “based on size and industry”
On the extreme side, some companies “VERY RARE” can have much more than a 30x such as Amazon which has around a 100x of Annual Profit. New companies that are raising money for growth can raise substantially more than what their company brings in profit annually and your net worth is based on the most recent fundraising valuation.
Company A is pre-revenue “no money has been made”. They raise $5m at a 4x valuation. This put’s their company net worth at $20m. If you own the company outside of the new investor you brought on, your net worth is $15m as you gave 25% ownership of the company to the new investor you brought on board. So while your company doesn’t have any revenue, you are all of a sudden worth $15m!
Do you honestly think a millionaire or billionaire actually has that much money in his / her bank account?