How to valuate a startup for equity financing is often asked by startups and early stage companies. There is no exact formula when assembling a valuation for a startup company. This is because there are numerous unknown or unproven factors that may greatly affect the outcome of the companies performance and competitive advantage in the coming years of operation. This article covers a few of the aspects to consider when assembling the valuation of your company.

When a company is looking to raise funds one methodology they could employ is selling equity. Selling equity begins by evaluating all possible aspects of the company that can arguably hold value and producing a valuation of their approximate worth. The worth of these aspect of the business can be based on both qualitative and quantitative measurements. The bases of these aspects of worth are typically founded in factors such as a company’s financial track record, internal track record, company or brand story, market penetration, brand mind share, potential market size, company advantage over the market and any other factors that can be justifiably explained to add value. This is why the final valuation is often the result of a negotiation between the company and the investors. A company’s attractiveness in the investment market at any given time has an impact on how high the valuation can be. This negotiation aspect of the valuation process is how unicorn startups are able to justify multibillion-dollar valuations prior to generating any revenue.

The initial valuation of equity in a company is calculated by multiplying the arbitrarily chosen number of shares the company has by the perceived value of the company. Example: A company has one million shares of equity and a valuation of five million dollars. This concludes that each share of equity is worth five dollars each. If the company would like to raise one million dollars in equity it would have to sell twenty percent of the equity in the company or two hundred thousand shares of equity at the price of five dollars a share.

When communicating with investors, it is important to note which version of valuation is being communicated. The first version of company valuation is pre-money which refers to the valuation prior to the infusion of investor monies. The second version of company valuation is post-money which refers to the valuation after the infusion of investor monies. Example: if the company has a pre-money valuation of ten million dollars, and it seeks to raise an additional fifty million dollars through a new round of preferred Series D stock, once that round is closed and all such Series D stock is sold, the post money valuation will be sixty million dollars.

If you are a startup or an investor interested in investing in a startup, and have questions on equity financing, and/or valuation of the company, contact us for a complimentary consultation.