The Challenge Of Figuring Out Your Pre-Money Valuation

YoungUpstarts

Sometimes the list of challenges may feel never ending – from writing the business plan to finding the right partner – but one of the single most important challenges entrepreneurs face is calculating a realistic, defensible pre-money valuation. . What is a pre-money valuation and why should I care? A pre-money valuation (or PMV) is the amount a company is valued at immediately before it receives investment.

The Changing Venture Landscape

Both Sides of the Table

I’m over-paying for every check I write into the VC ecosystem and valuations are being pushed up to absurd levels and many of these valuations and companies won’t hold in the long term. On the one hand, you’re over paying for every investment and valuations aren’t rational.

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Cap Table Explained — What is it and How to Maintain it for Investors

Up and Running

For instance, the cap table will help you with various possibilities while running business activities like available options and pre-money valuations faster. Here is an example of a cap table after a round of funding, with a pre-money valuation of $1 million.

Friday Funism – “Doable Deal”

View from Seed

One of the key conversations that happens during NextView’s evaluation of an investment is the “debrief” after the partner meeting , where the entire partnership gets the opportunity to interact with the founding team and dive deeper into the business. . how much the company is raising, valuation expectations, round/syndicate dynamics, etc.). I can see this being a doable deal at an $X pre-money valuation with a $Y check from us. ” .

Convertible Note Seed Financings: Econ 101 for Founders

Scott Edward Walker

This part 2 will address the economics of a convertible note seed financing and the three key economic terms: (i) the conversion discount, (ii) the conversion valuation cap and (iii) the interest rate. Part 3 will cover certain special issues, such as (i) what happens if the startup is acquired prior to the note’s conversion to equity? and (ii) what happens if the maturity date is reached prior to the note’s conversion to equity? What Is a Conversion Discount?

Keep Term Sheets Simple for Quicker Cash to Spend

Startup Professionals Musings

Entrepreneurs sometimes assume an initial agreement with an Angel is a commitment, so they start spending before any money is received. The price is the percent of ownership given to the investor, calculated as “investment/post-money valuation.” The pre-money valuation is company value today, while the post-money valuation is the pre-money valuation plus the investment amount.

Why Raising Too Much Money Can Harm Your Startup

Both Sides of the Table

Amongst the most often asked questions I get from founders is, “How much money should I raise?” Reflexively founders want to raise as much money as they can because they figure it will give them more resources, better chances of competing and a longer runways before they have to do the often painful job of asking, yet again, for money. Every time you ask for money you’re faced with the possible of feeling literally and figuratively like a failure.

State of VC 2.0

View from Seed

This post is inspired by some of the earliest conversations I have had with the team here at NextView and since the beginning of my VC journey. Or is there a major disconnect between a portfolio’s valuations and the actual dollars returned to LPs?

Startup Fundraising Trends: Ask the VCs

Early Growth Financial Services

Not only was the conversation lively, there was even a bit of a West Coast versus East Coast smackdown. Median pre-money valuations have increased by 43% so far in 2014 compared to 2013. In case you missed our recent webinar, we featured panelists Lucas Nelson, Principal, Gotham VC; Marlon Nichols, Director, Intel Capital; Alan Wink, Director of Capital Markets for EisnerAmper LLP; and Sirk Roh, COO for Early Growth Financial Services.

State of VC 2.0

View from Seed

This post is inspired by some of the earliest conversations I have had with the team here at NextView and since the beginning of my VC journey. Or is there a major disconnect between a portfolio’s valuations and the actual dollars returned to LPs?

Founders Should Set Aside More Equity for Their Team & “Split the Pain” With Investors

Hunter Walker

No one wants to run out of equity pool midway between financings (and larger seed rounds these days usually means more hiring pre-A)! What if we split the pain [ie increase pre-money valuation slightly on our end and founders take slightly more dilution off their end]?” ” To me these types of conversations, when backed by a hiring plan, show real maturity and proactively valuing the construction of a high quality team.

A bridge (round) to somewhere

David Cohen

We’re living at a time when valuations are very high, as Fred Wilson and Ari Newman have both recently pointed out. When valuations rise, so do the caps on notes, which are upper limits on valuation at conversion. The reason the entrepreneur want a high cap is to signal a high price for the next equity financing of a larger amount of money. For example, a company may be raising $1M in notes at $15M pre-money valuation cap with a 20% discount.

What is it Like to Negotiate a VC Round?

Both Sides of the Table

I am reminded of this problem every time my firm does a financing where a note went before us but more specifically I was reminded by this great post by Brad Feld to talk about the pre-money vs. post-money conversion issue. In the old days VCs funded off of a “pre-moneyvaluation. Pre-money ($8m) + investment ($2m) = Post-money ($10m) and the investors now own 20% of your company $2m / $10m.

Should Investors in the Same Round of Financing Ever Get Different Prices?

Both Sides of the Table

We plan to raise at a $5 million pre-money valuation. million pre-money. In the document it outlines that you will issue stock at a $5m pre-money valuation and in recognition of the additional risks and commitments of early money you have allocated warrants to the first $150,000 of investors. This is occasionally how convertible notes are structured at the time of conversion anyways. They might have all of their money smoked.

Why Startups Should Raise Money at the Top End of Normal

Both Sides of the Table

2: As expected at least one person accused me of writing this post because I want to see lower valuations. I wrote this because over the last decade I’ve seen a destructive cycle where otherwise interesting companies have been screwed by raising too much money at too high of prices and gotten caught in a trap when the markets correct and they got ahead of themselves. As the risks below get eliminated the higher the valuation investors are prepared to pay.

State of VC 2.0

View from Seed

This post is inspired by some of the earliest conversations I have had with the team here at NextView and since the beginning of my VC journey. Or is there a major disconnect between a portfolio’s valuations and the actual dollars returned to LPs?

How Much Should You Raise in Your VC Round? And What is a VC Looking at in Your Model?

Both Sides of the Table

There’s a quick litmus-test conversation any early-stage VC will have with the founder and it’s one that you should be as prepared for as your elevator pitch. It goes something like this … VC: “How much money are you raising?” He or she wants to know how long the money you will raise will last and whether this is long enough to warrant taking a risk on funding you. It’s the amount of money you’re raising. Cash Out Cash out is when you’re out of money.

Keep Term Sheets Simple for Quicker Cash to Spend

Gust

Entrepreneurs sometimes assume an initial agreement with an angel is a commitment, so they start spending before any money is received. The price is the percent of ownership given to the investor, calculated as “investment/post-money valuation.” The pre-money valuation is company value today, while the post-money valuation is the pre-money valuation plus the investment amount.

How to Evaluate an Offer from a Startup Incubator

The Startup Lawyer

The following are some issues to consider and actions to take before accepting an incubator’s offer: (1) Calculate Valuation and Determine Value. Pre-money valuations startups receive from incubators are typically low…really low. If an incubator offers your startup $25,000 in exchange for 6% equity, the pre-money valuation is a whopping $391,667. The “revised for the cash investment only&# pre-money valuation is $600,000. (2)

Cap Table Clean Up

ithacaVC

When raising money from investors (angels or VC), it is critical to have a presentable and clean cap table. There are many reasons for this, but fundamentally, it is impossible to calculate a share price for the investment round unless you have complete agreement on how many shares are outstanding pre-money. The share price is calculated by taking the pre-money valuation and dividing it by the number of shares outstanding pre-money.

How Investors Can Bring More Than Just Money To The Table

YoungUpstarts

For startup founders and CEO’s it’s also just as common to see them place too much focus on the amount of money raised, and the pre-money valuation, rather than the value that each investor can bring to the table. That’s not to say all money has to be “active money” but if you are looking to get into the best deals at the seed (or even Series A stage) it’s often a huge advantage if you are an investor who brings more than just money to the table.

Convertible Debt Revisited

ithacaVC

The first was Mark Shuster’s post titled “ One Simple Paragraph Every Entrepreneur Should Add to Their Convertible Notes ” and the second was Brad Feld’s post titled “ The Pre-Money vs. Post-Money Confusion with Convertible Notes “ Mark’s post warned of the often unintentional punishment that founders inflict on themselves when doing a convertible debt deal that contains a valuation cap.

What Do Industry Insiders Think Will Happen in VC in 2016?

Both Sides of the Table

They point to some widely known facts: financings & valuations are up massively over the past 7 years and non-VC money has entered the system. note: to follow realtime conversations & engage with me on Facebook you can follow me here: https://www.facebook.com/msuster ]. Limited Partners (LPs) who invest in VC funds have continued to pour money into venture – with the market returning to pre-recession levels. The result of all of this new money?

LP 199

The Convertible Note Discount Price Cap

The Startup Lawyer

compensate the angel for the early risk), the convertible promissory note will have an automatic conversion discount feature by which the angel investor will exchange the convertible debt for shares of the Series A Preferred Stock at a discount to the price per share paid by the venture capital fund at a Qualified Financing. For more background, check out this post for an example of how convertible debt and the conversion discount works.).

8 Questions to Help Decide if You Should be Raising Money Now

Both Sides of the Table

When times are really good for fund raising many teams delay to maximize their valuation. This conversation seems to come up very frequently these days both with portfolio companies and with entrepreneurs just looking for mentorship. If you are able to raise money from credible sources at a reasonable dilution percentage then I personally favor getting the round done now and building your business. You’re offered a $9 million pre-money to raise $3 million (e.g.

When Should Startup Founders Discuss Valuation with Seed VCs?

View from Seed

Using NextView as an example, since we both seek to lead the seed round and only lead during this round, I’ve seen this trend manifest in one of two ways: In a priced round, the entrepreneur will often share their valuation ask (or a stated floor) for the pre-money valuation of their company much sooner in the process. Or, in the case of a convertible note, they’ll explicitly state a valuation cap.

Can VC’s Invest Across Two Funds?

Both Sides of the Table

In one of the posts I spoke about how the size and vintage of funds might affect you when you’re raising money. As usual the rule is, if you’re doing well, they’ll find the money for your next round.&#. As a reminder, VC funds are comprised of money from LP’s (Limited Partners) that include university endowments, pension funds, high-net-worth individuals, insurance companies and large corporations.

In VC deals, Price Doesn't Matter - But The "Promote" Does

Seeing Both Sides

A typical start-up company will do 2-4 venture capital financings before a successful exit (or, conversely, an ignomious ending). Entrepreneurs often mistakenly focus solely on the pre-money valuation while VCs look at multiple knobs in the negotiation to drive to a set of terms that, in total, they find acceptable. The first, and most focused on, is something called the pre-money valuation.

Cliff Notes S-1: Kayak ? AGILEVC

Agile VC

How They Make Money: Majority of Kayak’s revenue actually comes from advertising on their site (55%), not lead generation or referral fees to travel suppliers as you might think (more on this below). At the end of the day Kayak’s playing a key role in the online travel process, but it appears more of the revenue comes from filling top of the conversion funnel rather than the middle or bottom of it. Post-money valuation probably no higher than $12M (2).

Thoughts on Convertible Notes

K9 Ventures

The convertible note was really intended as an instrument for a “bridge financing” – when an equity round was imminent, and likely to occur, but the company needed some money in between. Since the financing would likely happen in short order, there was no need to have a valuation cap in the note. The founders’ interest is to maximize the valuation of the company at the time of a follow-on financing, thereby minimizing founder dilution.

Term Sheet Purgatory

The Startup Lawyer

While progressive discussions with an investor about the investment are fine and most revolve around pre-diligence matters, sometimes these discussions shift towards the pre-money valuation and investment amount. It can be a mistake to arrive at a consensus with your investor on pre-money valuation & investment amount before receiving the full term sheet.

How to Talk About Valuation When a VC Asks

Both Sides of the Table

One of the hardest things about the fund-raising process for entrepreneurs is that you’re trying to raise money from people who have “asymmetric information.” I thought I’d write a post about how to talk about valuation at a startup and give you some sense of what might be on the mind of the person considering funding you. What was the post money on your last round (and how much capital have you raised)? I know our last round valuation was too high.”

The Changing Structure of the VC Industry

Both Sides of the Table

We are in a bubble (with so many private $1bn+ valuations). pre-money valuation you certainly would want to exercise your right to continue investing if you had prorata rights. At the other end of the spectrum large funds have gotten even larger in the past few years which has massively increased the amount of consolidation in our industry as 66% of LP money into venture is now concentrated in late-stage or full-cycle VCs.

How to Fund Your Startup Without Losing Control

Up and Running

When you accept outside money, particularly a private equity (PE) investment, however, that changes. That’s because obtaining a pre-money valuation for a concept level technology company in excess of $1 million is difficult, particularly for a startup founder without a proven track record. By contrast, obtaining a pre-money valuation of $5 million for a business with a new viable product and even very minimal sales is somewhat reasonable.

Finance Fridays: Getting Started – Allocating Equity and Founder’s Investment

Feld Thoughts

Through a series of conversations, Jane and Dick have come up with the idea to develop a social network tailored to the medical community. While they could both go without salaries for a year, Dick had no extra money to invest in the business. Jane and Dick had several options, including structuring this as a debt transaction where Jane simply loaned the money to the company, or as convertible debt transaction where Jane’s investment would convert into equity in the next round.

Equity 139

3 Economic Rules Every Crypto Start Up Must Obey

Austin Startup

Our pre-money valuation for the seed round is 2 trillion dollars.” For example, bitcoin makes it possible to transfer money between parties without fees, or oversight from your bank, government, etc. Overall, bitcoin is probably the lowest transaction cost method to transfer “money” securely to anyone, anywhere, for any reason, and at any time.

SEC 57

Knowledge Is Power: Convertible Note Financing Terms, Part IV

Gust

In Parts II and III, we looked at commonly used mandatory and voluntary conversion language in convertible notes. Investors would be repaid their principal, plus accrued interest, divided by the conversion price (let’s say 30% discount, so 1 – 0.3 = 0.7). Using some sample numbers, let’s assume the startup has a term sheet on the table from a VC to invest $3 million at a $10 million pre-money valuation when our hypothetical $30 million acquisition offer materializes.

Signaling Pricing Expectations Early in Seed Investment Discussions

Genuine VC

By communicating pricing expectations with potential lead investors, I mean sharing either an “ask” or even stated floor for the pre-money valuation of the company (with a priced preferred round) or explicitly stating a valuation cap (for convertible note round). Directly stating a high valuation expectation up-front can, on the positive side for an entrepreneur, anchor the negotiations to a higher level (assuming that investor takes the leap of faith to invest).

The Option Pool Shuffle

venturehacks.com

SUPPORTED BY Products Archives @venturehacks Books AngelList About RSS The Option Pool Shuffle by Nivi on April 10th, 2007 “Follow the money card!&# – The Inside Man, Three-Card Shuffle Summary: Don’t let your investors determine the size of the option pool for you. Use a hiring plan to justify a small option pool, increase your share price, and increase your effective valuation. The option pool lowers your effective valuation.

So What is The Right Level of Burn Rate for a Startup These Days?

Both Sides of the Table

There is much talk these days that startup valuations have decreased and may continue to do so and that the amount of time it takes to fund raise may take longer. The earlier the round, the less capital you need and the more reasonable your valuation the less time that is needed generally to raise capital. In other words, raising $2 million at a $6 million pre-money valuation has always been easier & quicker than raising $20 million at any valuation.

Convertible Note Term Sheets

The Startup Lawyer

Convertibility : What amount of equity financing is required to trigger automatic conversion of the convertible notes to equity (i.e., Do the convertible notes convert to equity on the maturity date, and if so, at what pre-money valuation ? Just like the preferred equity financing process, the convertible debt financing process can start with a term sheet, rather than a full set of financing documents.

Time is the Enemy of All Deals

Both Sides of the Table

I think the perfect saying to have as a reminder is “time is the enemy of all deals,” or as my wife is all too tired of hearing me say, “Don’t pop the champagne until the ink is dry on the contract and the money is in the bank.”. When I was raising money for my first company we had closed a seed round in 1999 and were working on our A round. million at a $15 million pre-money valuation. Morgan Stanley had proposed a higher valuation to let them in.

The Truth About Convertible Debt at Startups and The Hidden Terms You Didn’t Understand

Both Sides of the Table

Some thoughts on raising angel money. What the entrepreneurs were really saying is, “I don’t want to take a lower valuation now, while I don’t have customers or a full team. I want to use investor money to build these things. What investor would put money into a company and then agree a price later based on success? If somebody gives you money under a convertible debt note at a $2.5m But at least you had more money to pay them.