I was reviewing a deal for a minority investment in a private business and the owner is using the Enterprise Value (EV) as the basis to buy into the company.

Would it be more accurate to use the Equity Value (EV - net debt) to determine the valuation of the shares?

Example, two different scenarios (without the impact of share issuance):

1. $10m EV. If I invest $1m I would own 10% of the equity
2. $10m EV, $5M net debt = $5m equity value. If I invest $1M, I would own 20% of the equity.

Big difference.

What approach makes more sense and why?