Fundraising · Valuation

Pre money Valuation

Alison Lewis CEO/Creative Director

December 27th, 2013

We are applying to an incubator and they want a return for 20K investment. Are there any guides or resources to understanding your pre-money valuation that you all can recommend. Specifically interested in hardware start-ups who have created working and tested prototypes. 
More than 65% of new companies fail because they lack funding. In this course, you’ll learn common fundraising mistakes, how to nail an elevator pitch, how to craft a killer pitch deck, where to source investments from, and all about term sheets and convertible notes.

Blake Caldwell

December 27th, 2013

No, they get 24K of equity for 20K of cash

Cheryl Tom CEO, Founder at Vain Pursuits

December 27th, 2013

To clarify, the accelerator terms I've seen don't issue notes. They set a price. And they are very low... because their value add is not in the cash, teams will accept low valuations going in knowing that you will get a ton out of the program. So, my advice is to not even worry about you're valuation going in (it will be 'bad'). Determine if you can raise your value (through traction or whatnot) in the 3 months, if you can leverage the resources they provide so that your next raise is at the best valuation possible. 

Cheryl Tom CEO, Founder at Vain Pursuits

December 27th, 2013

Hi Alison,

I believe the 20% is in reference to what is usually called a Discount. This means that the holders of the note piggyback on to the terms negotiated by your lead in the next significant financing, and in exchange for their risk they get a 20% discount on the price. 

It's not in your advantage to set a price at this stage - valuation at the incubator stage is irrelevant. I'd focus on the delta in value you can create so that your valuation coming out of the program is interesting. Most have them have standard terms for their cohort anyways. 

I did TechStars in my previous startup - the value is in the network, mentorship and community. Check out the terms for YC, TS, 500. If yours are in that range, I'd jump in. Of course, talk to alumni and make sure there is real value in the program. 

I recommend venturehacks.com for good info on financing. 

I assumed you meant accelerator. Incubators and accelerators are not the same thing..

Robert Clegg

December 27th, 2013

You use what is called "convertible debt". It means the incubating company will get to convert the 20k they give you from debt to equity at the next significant financing round. You can state that in the doc. it's a very straight forward document (compared to issuing stock). 

These notes usually include a 20% kicker to sweeten the deal.

This removes the question of valuation since it's not a real discussion at this point anyway. What it does is put the valuation on the next round that is being invested in by sophisticated investors. basically the incubator gets to ride along with a 20% bonus.


Robert Clegg

December 27th, 2013

It's also assumed you have a lawyer/firm well versed in making these kinds of deals. ; )


cbgsfghjsfhjs arggadghA Brightway Insurance & KnowMyNestegg.com

December 27th, 2013

https://www.quora.com/Y-Combinator/What-are-the-pros-and-cons-of-YCs-new-SAFE-securities-versus-convertible-notes

 

You should review the above question/answer. 

I have gone through unsuccessful fundraising due to the terms inserted into convertible debt that I had to walk away from (you don't want anything to have "recourse" to you personally). I think Y-Combinator has a very good alternative to convertible debt, for both the investor and company.

 

Not that convertible debt is bad, but it is not the only option in town.

 

Full disclosure - I wrote one of the answers. I am not trying to self promote. Please go to http://ycombinator.com/safe/ if you want to skip over the Quora answers.

Alison Lewis CEO/Creative Director

December 27th, 2013

That seems strange to me. If I understand you correctly, does this mean they get 20% for 20K? If so, that's not really of interest to me. Alison Lewis, CEO, Switch 646-894-0809 *"Stop Tuning Out and Turn On!"*

Robert Clegg

December 27th, 2013

no, 20% discount on what they put in. So, if they put in a $1 today at "unknown valuation" they will get  the value of $1.20 purchasing power at the next round.

20k now, 24k value in next round.