Angel investing · Seed funding

How to approach pre-money valuations during seed stage?

Corey Blaser Sailor. Mormon. Entrepreneur.

September 5th, 2014

Is it best to approach a pre-money valuation as an open negotiating point with seed angels or should one have an idea of what the value should be set at before hand? I feel that if one has a preconceived idea of what it should be, that any number is really just arbitrary. 

And are there any concrete and scientific methods for choosing a specific valuation that are better than the others?

I would like to make sure we are set for the future so I don't want to over value or undervalue our company. We will be expecting to raise an A round within a year and would like to reduce any speed bumps. 

Neil Weintraut Co-Founder at Rendevu

September 5th, 2014


First your last paragraph are concepts worth cherishing/keeping.
Keeping financings/documents hygienic has numerous benefits and avoids very very painful - and sometimes fatal - discussions.

This then reflects back to your question.
The best practice, and something that is widely used, is to avoid any valuation issue, by using a convertible note, that converts on the first sizable/professional investor, typically at a 20% discount to the valuation of that round.

And as a way of further motivating the above conclusion, to your question about methods for coming to a valuation - it's fruitless. Any spreadsheet is assumptions/opinions of revenues on a business that can't even be sure when it's first revenue will be generated. Even if you agree on a financial model, simply assuming a +/-2% difference in the NPV discount rate will swing the valuation across a range of, say, ten. The other method is using comparable valuations of comparable companies; the very description attests to how highly debatable that is. A professional investor isn't investing on such mechanisms. Rather it's just the dynamics of an overall portfolio, stage, how hot the company is at that moment, the amount of capital that is needed to the next fundable milestone, the amount of capital that will be needed to liquidity or CFBE, and most importantly, to have a cap-structure that has the people that are actually making the business successful, HIGHLY incentivized.

Dave Angelow Board Member at HAND Austin

September 5th, 2014

Concrete and scientific methods generally rely on cash-flow, market size, and factors that dont fit with disruptive start-ups

Part of the fundraising process is salesmanship and telling a solid story.  That said, a good case has been made for the "Berkus Method"  $2-6M based on a variety of factors.

Mike Moyer

September 9th, 2014

Hi Corey, I seem to remember that you are already using the Slicing Pie method for your equity. In my experience there is no good scientific model for seed stage/angel investing which is why I promote the use of dynamic splits.

I call the seed-stage valuation the "magic number." It's large enough to be good for you and small enough to be good for investors. If you are concept stage you are selling the dream and you may actually get more if you have a good track record. I once raised $5 million with nothing more than a PPT deck. I had some good experience and my partner had some good success.

If you have a little bit of track record that will be a determining, often limiting, factor. I often see startups who wait to raise money until after they launch their product only to find that investors want to wait and see how it does.

For most tech startups I tell founders to start at about a $1,000,000 pre money and go from there. No science, just experience. 

Charity Callahan Governance, Risk Management and Strategy

September 9th, 2014

Food for thought, this article The New Mathematics of Startup Valuation was a useful resource.