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  • Mike Lingle at Rocket Pro Forma

Valuing Your Startup



It’s an amazing feeling to see $2 million show up in your company’s bank account! Founders who are raising money always ask me how much their startup is worth. They want to know what to tell investors.


The hard way to value your startup is to use spreadsheet formulas like "net present value" and "discounted cash flow." You can also look at comparable deals in your space—but those can be hard to find since they're private (unless you can borrow someone's PitchBook account).


The easy way to figure out "How much is my startup worth?" is to take the two pieces of info you know:

  • How much money you're raising

  • About what % of the company that should represent (post money)

From there you can spend 30 seconds to calculate the valuation of a startup.



Here's the playbook we used to value our startup when we raised our series A round for SlideRocket:

  1. Find your valuation from cash raised and ownership % (It's quick and easy)

  2. Quickly negotiate your best deal

  3. Keep your eye on the exit

  4. Figure out how much money to raise

And check out Rocket Pro Forma if you're raising money and want to quickly create investor-ready financial projections (plus I’ve posted a ton of free resources for startups there).


1. Find Your Valuation from Cash Raised and Ownership % (It's Quick and Easy)

When people talk about “valuation” they usually mean pre-money valuation—so how do you know what that is? If you were an established company you could use discounted cash flow, but that’s hard with pre-revenue startups without predictable cash flow.


The basic fundraising equation is:


Cash Invested + Pre-Money Valuation = Post-Money Valuation


So $2 million of cash invested into a company with a pre-money valuation of $4 million = $6 million post-money valuation. The investors would own $2 million of that $6 million company, which is 2/6 or 1/3 or 33.33%.

When talking to potential investors, remember to always talk about what % they own in terms of the post money valuation.

What do I mean by this? Let's try a quick math quiz (it'll be fun, I promise). If I'm raising $200k and my startup is worth $1 million pre-money, what % will my investors own?


...take a minute to think about it...


...it's a trick question...


...the answer is not 20%...



When your investors put $200k into a company with a $1 million pre-money valuation, it creates a post-money valuation of $1.2 million (simply the $1 million pre-money + the $200k in cash). The investors own $200k of that $1.2 million post-money value, which is 2/12 = 1/6 = 16.67%.


Reminder: When talking to potential investors, remember to always talk about what % they own in terms of the post money valuation.


Quickly Calculate Startup Value

We knew we wanted to raise $2 million for our Series A, but we hadn't though much about what our startup valuation should be. We pitched about 40 potential investors, and finally found 3 who were interested. One of our investors said they wanted to own about 1/3 of the company after the transaction.


That allowed them to solve for the pre-money valuation by dividing cash invested by ownership %.


Cash Invested ÷ Ownership % = Post-Money Valuation


In our case, $2M Cash Invested ÷ 1/3 Ownership = $6M Post-Money Valuation.


Now simply subtract the $2M Cash Invested from the $6M Post-Money Valuation to arrive at a $4M Pre-Money Valuation.


Post-Money Valuation - Cash Invested = Pre-Money Valuation

In our case: $6M post-money valuation - $2M cash invested = $4m pre-money valuation


Our VCs sent us a term sheet with an offer of “2 on 4” — meaning a $2 million cash investment on a $4 million pre-money valuation. This would create a company worth $6 million after the transaction (post-money).


2. Quickly Negotiate Your Best Deal

You’ll get the best deal when you have multiple offers on the table at the same time. Remember when I said we pitched 40 investors and then got 3 offers?


That gave us two VC term sheets in hand plus a $1 million offer from the strategic investor.


I should point out that we got those 3 offers at the same time not because we suddenly got luck, but because:

  1. We became investable—By making 40 pitches we improved our presentation, slides, financial projections, and our company over time.

  2. FOMO kicked in—Once we had one term sheet, we were able to use that to get other terms sheets because investors didn't want to miss out.

Fear of missing out is what actually makes investors write checks.

Having three options put us in a great position to negotiate. After some back and forth we ultimately decided to go with a single VC because we were concerned that the strategic investors might restrict our freedom in an early round by steering us away from working with their competitors. We decided to revisit the strategic investor question in a future round of funding.


We were okay with the VCs taking about 1/3 of the company because it gave us cash in the bank plus the social proof of taking money from a firm everyone recognized. One of their partners with operating experience joined our board of directors and was hugely valuable as we grew.


We wanted to move quickly so that we could get the cash and go back to working on our startup. Fundraising takes a lot of time and is very distracting!


We did a bit of negotiating with of our VCs: we asked for a $5 million pre-money valuation (instead of the $4 million pre-money valuation they had offered us in their term sheet). They thought about this for a day, and then said, "Yes."


Awesome!


We had just negotiated “2 on 5”—meaning a $2 million cash investment on a $5 million pre-money valuation, which created a $7 million post-money valuation.


This gave our VCs 28.57% ownership since they now owned 2/7 of the company (their $2 million cash investment divided by the $7 million post-money valuation). So we saved almost 5% of equity from their 33.33% original offer of "2 on 4."


3. Watch Your Exit Price

Also remember to keep an eye on your potential exit price. Your seed and series A investors are looking to get at least 10x their money within 5 to 7 years. That means they’ll want you to sell your company that’s currently worth $7 million post-money for $70 million.


And if your company has a $20 million post-money valuation then you’ll need to sell it for closer to $200 million.


Crunchbase reported that the average acquisition price for startups since 2007 is $155.5 million, so it gets harder to find buyers the further up in price you go beyond that. There are many more companies who can acquire you for $50 million vs. $500 million, so you may actually be reducing your options by raising more money.


Keep in mind that Michael Arrington reportedly made more money selling TechCrunch for $30 million than Arianna Huffington did selling Huffington Post for $315 million—because he had raised less money so he still owned 80% of his company.


One other important piece of info is that when you see startups raising $50+ million, the founders and early investors are often putting some of that money in their pockets. This allows them to take some money off the table and rewards them early for their hard work.


4. Figure Out How Much Money to Raise

Our simple valuation formula requires us to know how much money to raise. How do we figure that out?


Option 1: We built out five years of financial projections and decided to raise $2 million based on projected revenue and headcount.


My Rocket Pro Forma financials template helps you quickly enter your assumptions and figure out how much money you need to raise. It also helps you create the mental map to run—and scale—your business.


Option 2, because I love quick solutions: Sari Azout—partner at Level Ventures—recommends budgeting $15k per person per month for 18 months to cover salary, office space, equipment, general costs like servers, and a margin of error.


So that means our raise of $2 million would give us 7.5 people for 18 months, which is more or less what we did with the money. We had two founders at that point and we hired a VP of marketing, a lead developer, a head of QA, an inside sales rep, and a head of business development.


We did, in fact, go through the money in about 18 months.


Next Steps: What's My Startup Worth?

Now you have enough info to quickly calculate the value of your startup using:

  1. How much money you're raising

  2. What % of the company either you or your investors want that to represent post-money

Please join my free Q&A session if you have questions or want further guidance.


Bonus content: Here's the video of the workshop I ran on Valuing Your Startup:



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Mike Lingle is obsessed with helping founders grow their businesses. He's a serial entrepreneur, mentor, and executive in residence at Babson College and Founder Institute. Check out Rocket Pro Forma if you want to quickly create your financial projections.

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