Tag: valuation

How to value a startup (part 2)

As discussed in part 1 of this post on How To Value A Startup, valuing a pre-revenue stage startup is an art in and of itself. But, once a company has revenue, even if minimal, it becomes yet another factor worth considering in its valuation. The question becomes: Just how important, if at all, are early stage revenues in determining an accurate valuation? When it comes to valuing startups with revenue, there are 3 basic schools of thought: Quantitative: A company’s value is based heavily/solely on future cash flows – its ability to make money in the future. Hybrid: The ability to make money in the future is important, but there are other value-based metrics that also contribute to an accurate early stage valuations. Qualitative: Projecting a company’s future cash flows is a waste of time as it is not only inaccurate, but unrelated to its current valuation.  The 1st School of Thought: Quantitative The following methods are based on the assumption that people value a company based on its ability to earn money in the future. DCF (Discounted Cash Flow) DCFs are...

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How to value a startup

Valuing a startup is hard.  And it’s probably as much an art as it is a science. It’s hard because early stage companies are at the very beginning of their lifecycles. I mean, how do you value a company with little to no revenues that makes promises of being the next Facebook? Why valuing a startup is important The reason this whole discussion even starts is that when a company raises money, it does so at a certain valuation — Company X raised $Y at $Z valuation. If a company grows from scratch to be a $500M company, that’s great for early stage investors but it really matters what valuation the investors put their money in at. In this example, there’s a big difference between putting money in at a $5M valuation vs. a $100M valuation. First, get the lingo down Professionals talk about “pre-” and “post-” money valuations. Pre-money is simply the value of the company at the start of the investment round – before any additional funds have been added. Post-money is the value of the startup...

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Coming to Terms with Term Sheets: What Angel Investors Need to Know

When an investor plans to make an investment in a startup, one of the things in the forefront of his or her mind is: what are the terms of the deal? Well, luckily a document exists whose sole purpose is to delineate all the deal terms. It is agreed upon by two parties, the startup and the investor, and called, fittingly, a term sheet. Term sheet: investment specifics So what does the big scary term sheet look like “in real life”? While I was reading through terms sheets during my internship here at OurCrowd, I realized that after parsing away the legal jargon (and parsing away some more…), they are basically lists—lists of terms that the investor and the startup have agreed to adhere to in this investment. Note that the term sheet (other than the confidentiality agreement therein) is not legally binding, but under most circumstances, these same terms will make their way into legal documents relating to the deal. The list of terms can be broken down into two categories by asking a simple question: as an...

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