Downloaded 48 times
Uploaded byRev1 Ventures
The Price
The document provides an overview of key considerations for entrepreneurs and investors in establishing a realistic valuation for a startup company. It discusses the capital life cycle stages from concept to growth, and how valuation requires a holistic view of the interests of the company, founders, and investors. Key aspects of valuation covered include quantitative and qualitative advantages, dilution, down rounds, sources of capital, arrival at a value using market forces and financial models, deal structure, and common terms in investment agreements.
More Related Content
More from Rev1 Ventures
![[BDD 2025 - Mobile Development] Mobile Engineer and Software Engineer: Are we...](https://cdn.slidesharecdn.com/ss_thumbnails/md-mobileengineerandsoftwareengineerarewestillrelevantsidiqpermana-251127010650-55224ef1-thumbnail.jpg?width=640&height=640&fit=bounds)
The Price
- 1. The Price Create aneffective valuation process for entrepreneurs and investors
- 2.
- 3. The Capital LifeCycle • Concept Stage: An idea and maybe a vision • Seed Stage: Business formation, prototype • Startup: Pre-production development, market evaluation, alpha test • Early Stage: Pre-revenue, beta and market testing, rounding out management team, initial sales • Breakeven: Refine market and marketing, accelerate sales, follow-on product definition • Growth: Further sales growth, identifying potential acquisitions/acquirers/IPO
- 4.
- 5. Valuation Requires aHolistic View The Valuation process and results affect the immediate and long-term prospects for the company, founders, and investors The Company: Sustainability The Founders: % Ownership The Investors: ROI The Valuation process sets the tone of the relationship between entrepreneur and investors for months and years ahead
- 6. The Interests ofEntrepreneurs and Investors are Naturally Aligned • They have a common goal: • Building an enterprise that produces: • Value for customers • Profits for the company • Opportunity for employees • Financial returns for entrepreneurs and investors • It is everyone’s mutual best interest to share information as openly and completely as possible • A relationship rooted in common understanding and mutual trust creates the framework for creating a great venture and sharing in the rewards
- 7. The Reality ofValuation 1. Investors look for the potential to scale revenue rapidly from $30M to $100M to reach 5X-10X returns—a reasonable desire for the risk they take 2. To grow a startup business usually requires multiple rounds of investment 3. Therefore, the starting ownership percentage of the founder and any pre-revenue stage investor will likely be diluted over time 4. Dilution at exit can be expected to range from 25-70%, or more, based on the number and size of investment rounds and how the company performs 5. Understanding the mathematical effect of dilution helps an entrepreneur see an investor’s point of view and be more realistic about valuation 6. Investors have the money; entrepreneurs have the need
- 8. Constructing a RealisticValuation: Qualitative Advantages • Founder is a serial entrepreneur • Founding team and Advisory Board include individuals known and respected in the industry • Media recognition • Milestones matched to capital requirements
- 9. Constructing a RealisticValuation: Quantitative Advantages • A current cap table that is reasonable • Intellectual property is protected and unique • The market served is large and growing • The future capital plan will provide funds for 18 to 24 months • Early customers • Paying customers
- 10. Vocabulary of Valuation •Pre-Money Valuation: The value of a company prior to investment • Cash, patents, inventory, property, equipment, raw materials, receivables, etc. net of liabilities • New Investment: Capital raised during current round • Post-Money Valuation: Pre-Money Valuation + new investment
- 11. Valuation Example: SeriesA Round Assumption: • Your company has a valuation of $1,000,000 and you are the only shareholder • You sell 33% of your company to investors to raise $500,000 in a Series A round Pre-Money Valuation: $1,000,000 New Investment: $500,000 Post-Money Valuation: $1,500,000 Resulting Valuation: • You now own 66.67% of a company worth $1,500,000 • The new investors own 33.3% • The Series A Post-Money Valuation becomes the new Pre-Money Valuation
- 12. Valuation Example: SeriesA Round Assumption: • Your company has paying customers, valued IP, and a valuation of $6,000,000 • Shareholders sell 33% of the company to raise $2,000,000 in a Series B round Pre-Money Valuation: $6,000,000 New Investment: $2,000,000 Post-Money Valuation: $8,000,000 Resulting Valuation: • You now own 44.5% of a company worth $8,000,000 • The Series A investors own 22.5% • The new Series B investors own 33%
- 13. Dilution: A DirtyWord • A reduction in value of common stock that occurs because additional shares are issued or convertible securities are converted into additional common shares • The larger the number of shares, the lower the value of each share • The value of pre-round stockholders shares will be worth less unless the value of the company grows • Investors negotiate with the knowledge that most successful exits require multiple rounds of investment—meaning that their ownership percentage will be diluted over time
- 14. Down Round: Too-highValuations Cause Pain • Down Rounds result when preceding valuation was too high • Previous investors’ share of the business is diluted much more than normal • The lesson: Increasing valuation is very hard work Most companies will require follow-on capital Successful entrepreneurs set reasonable valuations
- 15. Sources of Capital •You and Your Team: If you don’t invest in you, others will be less willing to write checks • Family, Friends, Fools: Unadvisable unless they are in the business and can afford to lose every dime • Angel Investors: They bring cash, industry experience, amazing contacts, and the willingness to mentor and help • Venture Capital: They favor growth stage opportunities. Less than 2% invested in early stage • Customers: If you have what they need, there’s the possibility of a strategic partnership • Government: Depends on solution and stage. SBIR/STTR programs supply non-dilutive capital • Banks: They look for positive cash flow first
- 16. Arriving at aValue • The Reality in Early Stages: You are valuing a company that has no revenue, no track record, and few if any customers • Asking investors to spend $500K-$1.5M based on scenarios • Valuation Considerations Market Forces Industry Experience • Valuation Models Exit Comparables—public and private Net Present Value (NPV)—Discounted Cash Flows
- 17. Market Forces • Mostearly stage investors seek deals in a close-in geography • What are investor colleagues paying? • How much competition is there for local capital? • How hot is the particular technology/market segment? • Are there local capital sources interested in your sector? • Do angels in your region syndicate?
- 18. Exit Comparables • Considerpublic and private exits • Draw data from national sources • Subscription services such as VentureOne and Venture Economics • Dow Jones VentureSource (dowjones.com/privatemarkets/venturesource.asp) • SEC filings—www.sec.gov/cgi-bin/srch-edgar • Find competitors’ or comparable companies’ S-1 filings and deconstruct their financial history • Talk to advisors, legal counsel, accounting • Local angel groups have data on exits • Angel Resource Institute (ARI) Halo Report (http://www.angelresourceinstitute.org/data/ACEF/DataProje ct/1H2012HaloReportFinal.pdf)
- 19. NPV of DiscountedCash Flows • Requires several quarters of sales performance • Application for companies in early to growth stages
- 20. Deal Structure • Dealsimplicity and valuation are directly related • If you want the money quickly, seek a simple structure • Higher valuation, complex deal structures, result in more money going to lawyers • Most private equity investments involve purchase of stock with specific conditions and protections • Those conditions and protections are manifest as preferences • Investors will get their money back first, with a preferred return before anyone else
- 21. Investment Return Analysis •Investors expect ROI based on their investment risk • Each stage of company development requires a certain type of investor
- 22. Founders’ and ManagementTeam’s Payout • Consider valuation in terms of absolute dollars instead of as a percentage of company ownership • $3M payout invested at 4% in tax free bonds generates $10,000 per month • What does your company need to accomplish in 3 to 5 years to attract a buyer to make your financial goals a reality?
- 23. Financial Structure • Asa rule, deal complexity is related to the current status and history of accomplishment • Private equity investment instruments have evolved to protect the investor and offset risk • Terms and conditions affect the structure of the company and board, and management responsibilities to the investors
- 24. Corporate Stock • CommonStock: Generally voting, usually the first stock issued. Basic rights provided by state and federal law called “Blue Sky laws” govern offerings • Preferred Stock: Ahead of common stock in liquidation, with specific privileges regarding voting, board representation, rights to documents, dividends, repayment period, forced sale of the company or offer of public securities. Can result in a minority owner effectively controlling the company
- 25. Startup Advantages ofPreferred Stock • Will attract more sophisticated, experienced investors • Provides for a dual-priced stock structure • Common stock can have a substantially lower price than preferred • The lower-priced common stock can be used for employee stock incentive plan • Over time, the price differential between the classes must converge
- 26. Convertible Debt • Fullysecured by assets, including IP • Convert to securities, often at same terms of the subsequent investment round discounted • Above market interest rate with interest payments often deferred • May be used as a bridge between rounds • Best convertible debt terms don’t avoid valuation
- 27. Venture Debt • Small,regional, non-bank venture leaders invest in early stage revenue-producing firms • Intention is a debt position • Often include warrant provisions • May be secured by intellectual property, other company assets, and personal guarantee by the entrepreneur, but are not always fully collateralized • Not convertible to equity but can include warrant coverage • Rates are typically 2X bank rates or more
- 28. Term Sheets • Startwith standard documents • Anticipate future rounds • Develop a basic business understanding of common terms • Engage an experienced attorney
- 29. Common Terms • SharePrice • Total Ownership • Board Structure & Membership • Liquidation Preference • Dividend Preference • Voting Rights • Class Approval for Specific Events • Anti-dilution protection • Conversion of Stock • Preemptive Rights (issuing treasury shares in future) • Right of First Refusal (buy pro rata share if other S/H sell) • Co-sale Rights (right to sell shares if other S/H sell) • Registration Rights (possibly in subscription agreement) • Demand Rights • Piggyback rights (best efforts) • No superior rights granted • Follow-on and S-3 Registration Rights • Expenses of Registration • Indemnification of Selling Shareholders • Assignment of Registration Rights • Market Standoff/Lock-up provisions (180 day) • Notice (in time to convert) • Information Rights (often precludes information to others) • Annual Audited Statements • Monthly and quarterly P&L, Balance Sheet, and Cash Flow • Annual operating plan budget • Other information reasonably requested • Reasonable right of inspection • Key Personnel (who comprises key personnel, insurance on same, employment terms, etc)
- 30. Tips for Negotiation •Maintain flexibility and mutual respect. • Keep in mind: How each party will make money from the deal. There will surely be a next round of financing The exit strategy • Seed stage companies can expect a pre-money valuation of $500K to $3M. • When the deal closes, you will be in a relationship with your investors for years to come. Start off on the right foot!