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How much shall I value my startup?

Small Reminder - Pre & Post Money Valuation

Pre-money valuation is the value of the company on which entrepreneurs and investors agree before investors enter the capital. This is usually the reference value during negotiations.

Post-money valuation is the value of a company after investors have acquired a stake in it. For example, if a company has been valued at 100K in pre-money and investors inject 50K in capital increase, the post-money valuation will be 150K and the share of capital held by new investors will be 33.3%.

Thus, Post-money valuation = Pre-money valuation + invested amount

The valuation of your company will be a key issue when negotiating with potential investors, here are some tips on how to best manage it.

Plan a dilution range

In theory, the average dilution of a first emergence (early-stage / seed) is spread over a range of 20 to 30%. It depends in particular on the amount sought: the higher the amount, the greater the dilution accepted in theory.

But other criteria will be useful to you to determine the value of your startup before a fundraising such as: the sector (Is it technical? Leading? With a lot or little barrier to entry?), the innovation of the concept / product, the potential market, your traction...

Once your ideal valuation has been decided, it is preferable to remain flexible, at least until an investor's participation is confirmed in the round. This will give you more flexibility during the negotiation and ensure that you don’t miss any opportunity.

Once a valuation has been decided & communicated... Stick to it!

Nevertheless, as the meetings and negotiations progress, you will have to make a choice and definitively determine your valuation to validate the participation of Business Angels in the round. This decision is important and should generally not be made too early so you can several types of potential investors.

Care must also be taken not to "get confused" about valuation as with other investment conditions.

We will talk about it again, but the relationship with an investor is based above all on trust and honesty. Thus, as soon as you agree with an investor on a valuation and the investor confirms his participation (for example, with a letter of intent), you must stick to it and offer the same terms to the other interested parties.

If by any chance the terms were to change (unexpected investor interested, increase in the amount raise during the round...), it is important to be transparent with investors already involved. If the price is higher, they can always decide to withdraw.

Each interested Business Angel wishes to discuss the valuation, modify an existing clause or add an additional one. What had been agreed with a previous interlocutor was systematically called into question. At the beginning, I wanted to take into account the specific demands of each and reconcile these different requirements. Then, from the moment I had firm "yes" votes for investments, I stuck to a guideline and proposed the deal under these conditions, justifying them and indicating that they were not modifiable. As a result, even if I wanted to work with some BAs, receive their investment and benefit from their expertise, I indicated that this would be done according to this defined scheme. Some have declined, others have joined us, and things have progressed and become reality." Benoît from JeLoueMonCampingCar //[Link to the article] (]

Careful not to "overvaluate” your startup"

Choosing a valuation that is too high, if it means a lower dilution, can be risky.

First of all, it may hinder your first investors to participate in your round if they feel that it is not justified.

Also, agreeing on a high valuation means taking risks for the future, especially for your next round of financing. In theory, the valuation of a company is supposed to be multiplied by 2 or even 3 between your seed round and the upcoming A series, but this must be justified by solid metrics.

Finally, agreeing on a too high valuation also means taking risks with your investors who may have too many expectations in the 2nd round and may decide not to support you at that time.

Knowing how to make concessions

In conclusion, it should be kept in mind that the purpose of a fundraising is to raise quickly & well with the right investors.

It is therefore necessary to find the right balance between bringing in good investors in your turn, those who will bring you skills, network & personal involvement in addition to financing - and the conditions of your exercise. Sometimes, valuation has to be given second place.

You should care more about good investors than good valuations. Speaking of price, the mistake that founders make (corresponding to investors focusing too much on downside terms) is focusing too much on getting a high price. I have seen many founders price out good investors and put the company in a bad situation facing a down round a year later, all because they were obsessed with getting a high sticker price for their company. I think it’s because it gives founders something quantitative to compete on."
Sam Altman - Y Combinator

Updated on: 15/04/2019

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