5 Mar, 2018FORBES.COM
As you probably already know, one of the hardest things as an entrepreneur, when raising a round of financing, is figuring out your valuation. It is really an art and pricing the company poorly can have a negative impact towards future rounds of financings.
In this regard, the most common ways to put a price tag on your business include the following methods:
As you find above, there is more than one way to value your startup. Despite what it may look like in the media; there are actually solid equations for pricing investment rounds.
In the Fundraising Certificate, which is an online seminar where founders learn everything about fundraising, I do a deep dive on valuations, but If you have high growth potential, here is a quick guide (in USD) from what I am seeing in the market:
Moreover, it is important to distinguish pre-money valuation from post-money valuation. Pre-money valuation is a term you often hear in the investing circles. This simply means the amount of value that is ascribed to the company by investors before the investment dollars go in. It’s mainly used as a benchmark to determine the amount of equity that new investors will get in a startup.
So if the “pre-money valuation” is $4 million, and the investors put in $1 mm, in theory, the founders own 80% of the company and the investors own 20% of the company.
However if the pre-money is $4 mm and the investors put in $2 mm, now the founders only own 66% of the company and the investors own 33% of the company. The pre-money valuation PLUS the amount invested gives you the “post-money valuation”.
In our first example it was $5 million ($4mm pre-money plus $1 mm invested capital) and in our second example the post-money was $6 million ($4 mm pre-money plus $2 million invested capital).
Using the pre-money valuation as a basis for investment is more common than post-money, because the value of the existing equity is not decreased based on the amount of additional capital the founders can raise.
In my opinion, the best way to establish a valuation is to see what the market is paying for some of your competitors when they were at your same financing stage. There are several sites that you can use to track such transactions. Using competitor valuations to establish your own makes it difficult for investors to tell you that your valuation is too high which is often a tactic used by investors to bring your price down in order to obtain more equity for their investment.
This article was first published by Alejandro Cremades on Forbes