Equity for Early Employees in Early Stage Startups

SoCal CTO

I was asked by a reader how much equity he should give out to early employees and to service providers in a very early stage startup. Founders vs. Early Employees To help with this discussion, let me start with a definition of "early employee."

The Truth About Early Stage Pre-Money Valuations

Ask the Angels

I think there are three fundamental truths regarding the valuation of early stage businesses by potential investors: The first is that a pre-money valuation is ultimately an outcome of negotiation , rather than a mathematical calculation of discounted cash flow or any other metric of potential company performance. Investors typically arrive at reasonable valuation conclusions after a process of due diligence. By Al Schneider.

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When In Doubt on Pre-Money Valuation, Smart Guys Procrastinate

Recent Buzzes - VC Experts, Inc.

If there simply is no way to get a handle on the pre-money valuation in an angel round, the trick is to postpone the valuation/pricing decision until a future event, typically the first professional (some times called the Series A) round of financing, when the company is more mature, professional VCs are investing and perhaps competing to invest, in which case the price is fairly, established by definition through an informal auction. By Joseph W.

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. .

2011 Valuation Survey of North American Angel Groups

Angel Investing News

During the summer of 2010, I developed a workshop, A New ACEF Valuation Workshop for Angels and Entrepreneurs. To provide some reference points, I surveyed thirteen angels groups in North American to determine their recent experience in negotiating the pre-money valuation of pre-revenue companies. See the 2010 data reported here: Current Pre-money Valuations of Pre-revenue Companies. 2011 Angel Group Valuation Survey.

Valuations 101: Scorecard Valuation Methodology

Gust

In 2011, the valuation of pre-revenue, start-up companies is typically in the range of $1.5–$2.5 Scorecard Valuation Methodology. This method compares the target company to typical angel-funded startup ventures and adjusts the average valuation of recently funded companies in the region to establish a pre-money valuation of the target. In most regions, the pre-money valuation does not vary significantly from one business sector to another.

10 Rules of Thumb for Startup Investment Valuation

Gust

Once you have a potential investor excited about your team, your product, and your company, the investor will inevitably ask “What is your company’s valuation?” How much is NewCo worth to investors at this point (pre-money valuation)? Image via eHow.com.

2011 Valuation Survey of North American Angel Groups

Gust

During the summer of 2010, I developed a workshop, A New ACEF Valuation Workshop for Angels and Entrepreneurs. To provide some reference points, I surveyed thirteen angels groups in North American to determine their recent experience in negotiating the pre-money valuation of pre-revenue companies. See the 2010 data reported here: Current Pre-money Valuations of Pre-revenue Companies. 2011 Angel Group Valuation Survey.

How Investors Think About Valuation of Pre-Revenue Startups

SoCal CTO

A lot of my time is spent helping early-stage companies get to proof points so that they can raise capital. They might have some seed money and are thinking or raising a Series A based on success of an early release (MVP). Because of this, I've always tried to stay up-to-speed on how early-stage investors look at valuation of companies. Bill Payne is an expert on how early-stage investors should look at valuation.

A Five-Minute Tutorial On How To Value Your Startup

Startup Professionals Musings

As an entrepreneur looking for professional investors, one of the quickest ways to lose credibility and get rejected is to start with a ridiculously high pre-money valuation. Equally bad is professing no valuation estimate at all, asking investors to “make me an offer.”

Sizing Option Pools In Connection With Financings

A VC : Venture Capital and Technology

Investors like to require that an unissued option pool is in the pre-money valuation calculation when they put money into early stage companies. Let's say you are raising $1mm at $4mm pre-money. And the investors want the option pool to be in the pre-money valuation. Without revenue coming in, five employees will suck up half of that money over 12 to 18 months.

Kevin Learned’s Perspective on Valuation

Angel Investing News

Kevin recently wrote a series of articles on the valuation of early stage enterprises, which I believe to be noteworthy. Part I – Valuing Early Stage Businesses: The Value of an Early-Stage Company is Related to its Riskiness. Part II – Valuing Early Stage Businesses: Comparisons. Part III -Valuing Early Stage Businesses: Understanding Angel Math. Part IV – New Data on Pre-Money Valuations.

10 Rules of Thumb for Startup Investment Valuation

Startup Professionals Musings

Once you have a potential investor excited about your team, your product, and your company, the investor will inevitably ask “What is your company’s valuation?” How much is NewCo worth to investors at this point (pre-money valuation)?

Quick Post on Post-Money Valuations

Rob Go

When I first started out as a VC nearly 9 years ago, most early stage company valuations were expressed as pre-money valuations. That is, the valuation of the company prior to the investment of new capital.

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.

When Should Startup Founders Discuss Valuation with Seed VCs?

View from Seed

As the seed-stage startup fundraise process has received more transparency in recent years, ranging from published advice on how to raise seed capital to increased availability through AngelList, Funders Club, and various accelerator programs, I’ve noticed another trend emerging.

10 Ways to Size Your Company’s Value for Funding

Startup Professionals Musings

Once you have a potential investor excited about your team, your product, and your company, the investor will inevitably ask “What is your company’s valuation?” How much is NewCo worth to investors at this point (pre-money valuation)?

The Silliness Of Recapping Seed Rounds

Feld Thoughts

A company raises $1m of seed money from angels in a convertible note with a $6m cap. Assuming equity is raised at or above that cap, the total dilution, before the new money, is 16.6% (equivalent to an equity financing of $1m at a $6m post money valuation. ” They are running out of money. The term sheet converts all the convertible debt into a post-money valuation of $100, essentially making the convertible debt worthless.

Want to Know How VC’s Calculate Valuation Differently from Founders?

Both Sides of the Table

Due to competitive markets we ended up with a pretty good term sheet until we needed to raise money in April 2001 and then we got completely screwed. It was accept the terms or go into bankruptcy so we took the money. Thus the “true&# pre-money is only $2.4

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)

A Great Discussion with @skupor @davemcclure @msuster on Changes in the VC Industry

Both Sides of the Table

We both agree that the later-stage valuations are being driven up to a point that feels irrationally priced [he uses b-round SaaS valuations as an example and I am willing to be even more broad based]. Video 1 is here : Late stage valuations are in a mini bubble.

What to Expect When You're Expecting Venture Capital Returns

This is going to be BIG.

so that's what I said my exits would be as a seed stage fund. If you could return investors nearly triple their money and mid 20's returns consistently, compared to the 8% long term return in the public equities market, they'd more than accept that.

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. It’s the one bit of advice I find myself giving most frequently these days, “raise money at the top end of normal.&#. million post-money valuation with no revenue.

Thoughts on Convertible Notes

K9 Ventures

There has been a lot of noise in the Valley lately about how most seed stage deals are now being done as convertible notes. Since the financing would likely happen in short order, there was no need to have a valuation cap in the note.

The Changing Structure of the VC Industry

Both Sides of the Table

The rise of “micro VCs” or seed-stage funds. 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.

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. ” And some seed stage investors told me, “I prefer not to fight over price now. 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.

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. This has led VC & entrepreneur bloggers alike to similar conclusions: start raising capital early and be careful about having too high of a burn rate because that lessens the amount of runway you have until you need more cash. How much money have you personally or your friends/family invested?

Don’t Pitch A Venture Capitalist Without This Checklist

David Teten

By surfacing the negatives early, you help establish a relationship of mutual trust and respect. I’ve listed below the points I recommend you cover when pitching your business to early-stage investors, including but definitely not limited to ff Venture Capital. If you are testing the market to see what terms you can get, just say, “We are targeting to raise $X at pre-money valuation of $Y.” How do you make money?

Convertible Debt – Valuation Caps

Ask The VC

Today, in our series on convertible debt, we examine the conversion valuation cap. The valuation cap is typically only seen in seed rounds where the investors are concerned that the next round of financing will be at a price that is at a valuation that wouldn’t reward them appropriately for taking a risk by investing early in the seed round. The entrepreneurs thinks their valuation should be higher. They receive a term sheet at $20 million pre-money valuation.

Investor Nomenclature and the Venture Spiral

K9 Ventures

In my view the terminology being used for early stage investors by the press and the media is not as clear as it should be. Sometimes this money comes with strings attached – strings in the form of expectations, which if not met can often hurt the relationship. Personal Money.

How and Why To Be an Angel Investor

David Teten

Enter Dave: Angel investing is a great way to make a lot of money. It’s also a fast way to lose all your money. Angel investors are generally former entrepreneurs and/or executives, who invest in privately-held, early-stage companies.

Why the New Seed Might Be a Bad Seed

This is going to be BIG.

About a year ago, I started hearing about the existence of a "pre-seed" round. If you can''t go to "seed" investors for your very first investment because you''re too early, that just seems weird to me. in seed money instead of $1.5M

Raising Financing: Convertible Debt vs. Equity

Instigator Blog

And I’d like the pre-money value to be $1.5M. The post money-value would be $2M and the $500k is worth 25% of the company. So in the Series A, when you now want to raise $2M and the pre-money valuation is $6M, the $500k is measured against a pre-money valuation of $4.8M. Now when you apply the 20% discount, the first investors’ money converts in at $4M. I’ve raised money as convertible debt.

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. 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. How do you push valuation?

Series A Warrants Based On Milestones Versus A Deal With Two Closes

Ask The VC

Let’s assume a post-money valuation of $4m. The post money valuation after the warrant is exercised is $6.25m (2.5m / 0.40). Bottom line – the investor is proposing a $3.75m pre-money / $6.25m post-money for a total investment of $2.5m. Generally, a warrant like this in an early stage investment (e.g. Question: In a Series A, the investor is proposing a preferred stock with warrants.

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

Feld Thoughts

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. That narrowed the possibilities down to an equity transaction, which would in turn require a conversation about valuation.

Entrepreneur Tools: The Returns Analysis

Secret Formula

And if you’re trying to raise capital from a VC – someone who invests other people’s money, and is out of a job if there’s insufficient return – analyze your own deal the same way he will. Also, early-stage investors fund younger, riskier companies, most of which fail.

Valuations 101: The Risk Factor Summation Method

Gust

The Risk Factor Summation Method the fifth methodology for estimating the pre-money valuation of pre-revenue companies we have described in recent posts. Readers may have noted that both the Scorecard Method and the Dave Berkus Method considered a narrow set of important criteria for investment in arriving at a pre-money valuation. Stage of the business. million pre-money valuation.

Series A Considered Harmful?

Possible Insight

My guess is that the difference is due to early stage VCs wanting bigger multiples than late stage angels and potential acquirers becoming much more price sensitive in the affected valuation range. Adding up the pre-money valuation and amount raised at Series A from Wilson Sonsini , we see that the typical post-money valuation is currently on the order of $10M. To be gracious, let’s assume 50% make it to that stage.

How does someone get a meeting with angel investor David S. Rose?

Gust

So even if my own mother asked me to meet with you, and you were pitching me a biotech opportunity for a $10 million investment at a $90 million valuation, I might take the meeting, but it wouldn’t be particularly useful for either of us. I’m also allergic to funding “bridges to nowhere”, so I would like to hear your explanation of what you are going to do if no money appears to follow your seed round.