Pre-money valuation

Best practices for establishing pre-money valuations

Luis Berga Co-Founder at Music Meets Video

February 1st, 2014

Hi everyone, 

I was wondering what people's experience has been with establishing their pre-money valuation. 

Are there resources to find this accurately?

Are there firms/individuals who charge for this? If yes, is it worth it?

My initial thought is to use comps and projections. Is this in the right ballpark?Is there a good place to find aggregate funding numbers for private companies? 

Thanks for any help!
Luis

George Arison Making car buying, selling, and ownership a delightful experience

February 1st, 2014

I think people spend too much time thinking about valuations - most of the time its useless. If you have not taken in any funding (which I assume is the case given your profile), thinking about valuations at this point is simply useless. You should raise a convertible note, use basic Y Combinator paperwork, and defer all of those decisions until the future. If you absolutely need to get valued, its important to remember that VC funding is a market driven process, and its best to have the investor come back with the first proposal. The few times when I've gone into a meeting and suggested xyz as terms, the meeting went badly. The many times when I've gone into a meeting and told the investor that I wanted them to get excited about the idea, the company, the team, and once they are ready to invest, then start talking terms, I've been very successful at raising a significant amount of money. And in all of those cases, its the investors who come back with a term sheet. You can then engage in a similar discussion with other investors, and if they are also excited, have them compete a bit on the price. Many VCs will tell you that valuation for them is derived from how much money is being invested, esp medium term (before company makes it big). They evaluate what you need to raise, and then based on that, they build a plan to have 20-30% of the company in return for that amount of money. Lastly, valuation is not the only thing to be concerned about when taking money. Who the investor is matters just as much as what the valuation is. Imagine that you need to hire person a, person b, and person c, and give up 75% of the equity to do it, but this team can get the company to be worth $100M. Thats much better than having a team to which you only give 25% in total, and the company is only worth $10M. Similarly, there are investors who can help get you to the next level, and they may be only willing to do things at a lower valuation than other investors, who are less valuation. Furthermore, there are liquidation preferences and control to think about as well.

Trish Costello CEO & Founder, Portfolia

February 1st, 2014

One of the best resources is Pitchbook's VC Valuations & Trends Report.  The numbers for 4Q13 are out now, and it splits out median valuations from seed up and by industries.  PWC and E&Y also put out quarterly data.  Angel List has valuation data (though their #'s seem low to me) If you have a good deal lawyer (and you really need one if you're raising money) they can tell you what they're seeing across their clients as far as terms being negotiated right now.  My experience is that its less about how many engineers you have and more about where you are with product traction/life cycle.  Demo stage with a few smart people $3-5M;  beta with a few more good people & some customers $7.5;  product with traction in a larger market and rounding out team  $10M & up.  Numbers show 4Q13 median seed $5.3M pre-money and $9.2 Series A.  Only about a third of seed deals are priced, but nearly everyone I talk with wants a valuation cap on a note, so you have to come up with a number.    

Dave Angelow Board Member at HAND Austin

February 1st, 2014

Steve McGough

February 1st, 2014

Interesting topic... here's a question - how much do you add to the valuation for Utility patents that are granted -- as well for ones in the US, EU, CA, AU?

Michael Brill Technology startup exec focused on AI-driven products

February 1st, 2014

I'm sure you'll get a million different responses, but there is no right way per se. If you want something that you need to stand up to the scrutiny of the IRS then a 409A valuation may be required ($1K-$2K)... it'll be quite a small number unless you've got meaningful revenue. Would generally avoid risk-adjusted DCF as it's kind of indefensible in most cases. If you have a solid product and an *awesome* engineering team then you can probably create an argument for $1m/engineer if you think you'll be bought.

Comps are generally the way to go. Lots of published data on early-stage valuations and hard to argue with. Even then, you probably want to discount that significantly to account for risk and the fact that those valuations are based on new money taking preferred (which is typically valued 4X-10X of common in early stage companies).

Ultimately the number is going to be what you want it to be. So identify the number and then rationalize it however you want. The only practical impact now is that the higher it is, the more expensive equity/options are for early employees.


Luis Berga Co-Founder at Music Meets Video

February 1st, 2014

Hi Michael, 

Ultimately yes, as we will be using the number we come up with to establish an equity structure but at this point just want to put a value on the entity.  


Michael Brill Technology startup exec focused on AI-driven products

February 1st, 2014

Is this for the purpose of setting equity-based compensation?

Devon Read Founder & CEO of Blockchain Technology Group

February 1st, 2014

Dan,

How much would you say a UI/UX engineer adds (former Apple UI/UX)?

Matthew Selbie Founder and President of Oberon3 - virtual comment card via the mobile phone

February 3rd, 2014

Agree with Trish. We used a triangulation of various discounted cash flows but even with some revenue, these tended not to be looked at and wasted a lot of time.
Comps and multiples of projected revenue seemed to be common. For SaaS businesses, showing recurring revenue from landed customers is a big deal as it shows traction and predictable cash coming in.

Dan Itsara Co-Founder at Glazziq

February 1st, 2014

For a seed round? $1M for each engineer on your team. Negative $500k for each MBA :)