Investor relationships

How to evaluate your business based on the investment you ask for?

Kim Kaiser Cofounder & CEO

January 24th, 2020

Hello,


I have a meeting with an investor tomorrow where we will discuss the potential investment into our startup.


We are asking for 200.000 USD with an estimated evaluation of 600.000 USD.


Our calculation: 200.000 USD Investment / 200.000 + 600.000 = 25%


Therefore, we are offering 25% of equity in return.


Now, we have heard that many investors calculate the company value by multiplying the investment amount by 4 (in this case) to reach a 100 % valuation (4 times 25%). That would result in a company value of 800.000 USD, which probably is not reasonable.


Could you provide arguments why the first evaluation calculation of 600.000 USD is more reasonable?

Jesse Tayler App Store Inventor, Startup Entrepreneur

January 26th, 2020

I think that 4X number you cite is more like a reasonably purchase price, for say, a restaurant or convenience store or packaging business you can start by figuring the price to purchase. Assuming numbers are in order, is going to be about 4X what it makes each year is for some reason a rule of thumb.


Since I don't really know if your business has been selling packaging to large customers for ten years and sales never change or if you are talking about a tech startup with debts or if your business requires laying cable across The Atlantic in order to start doing business...it would be hard to give you any responsible or useful answer.

Dane Madsen Organizational and Operational Strategy Consultant

January 27th, 2020

It is the same as you have explained it. The difference is pre money versus post money valuation.


If you value the business today without investment at $600 K and they add $200k, you have a $800 K post money (after the money is invested). That is 25% to the investor.