Valuation
The subject of valuation is so contentious in early stage propositions that I couldn’t possibly do it justice in a couple of paragraphs.
But the first thing to note is that it has to be covered at some point in your proposition. Otherwise it is not a proposition, after all what are you offering? That is your valuation is the result of what you are looking for in terms of capital and the amount you are seeking to give away.
For example 10% of the company for 100,000 essentially values the company at $1,000,000.
You don’t need to state that our valuation is x, you can just leave it that you are offering 10% of the company for 100,000 or whatever.
It becomes very confusing for early stage companies however. Most early stage companies don’t have 3 year’s worth of financial history never mind 3 years of profits from which we can multiply an industry multiple to arrive at a valuation. I disagree entirely with this approach in any case (that is another story), but it is the one that is most readily understood by SME owners.
Because of this, the essence of an early stage valuation (ie where the amount of capital required is disproportionate to the profit recorded) is largely “finger in the air” and negotiated – madness I hear you say – but it is just the way these things work out:
1) An investor is on the whole NOT seeing to take more than 50% of your company. Simple. This is demotivating for you and you are the one that has to remain motivated.
2) An investor is largely not going to be bothered with less 10% of your company. It is not worth their while – there are exceptions of course.
3) The investor is going to seek an investment of something between 20% and 50% and nearer the 40% in case there is a need to secure more capital in the short term.
Then the question is whether the company will be valued at least 3-5 times that (or whatever the investor seeks in terms of an exit valuation) in 3 or so years. If that seems reasonable then the valuation that the investor and you strike at, between 20-40%, is backed up with some science – sort of!
Tips from the Coal face:
If you are seeking a high net worth, make it worth their while. Offering 5% of the company is just not worth their time. They will want influence and opportunity. 5% may be fitting for Mum and Dad but not those that are serious about investing.
