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Legal concerns
- 409A to ensure against crazy discounts to employees
- company want to grant options to team as low as possible so they can have the benefit from joining
- don't give away the 409A to investors that would screw up the valuation
Valuation = Income / Risk
- either decrease risk or increase income
- get MOUs
- M&A very hard to use to push values. Different acquirers are only able to capitalize assets they are buying to certain extents
Hot air valuations - patent or number of engineers
- only useful if it's stopping a large player from getting to market
- need to fight violations to keep patent
- Company needs to own patent for it to be valuable for investors
- provional patents are a liabilities as they require further resources to be issued
- eye balls that cannot be monetized
Not really valuable
There is a reasonable valuation of projects at different stages
- Anything not technology or hardware leads to valuation below 1x of revenue - IOT is hard to value. Is a front loaded hardware play but software play eventually
- Towards later stage startups ESOP / Fair market valuation versus investment will converge
- convergence is based on successful team execution
Cost Approach to valuation for issuing ESOP
- Salary.com useful for making research on cost approach to monetization
- expenses incurred since inception
- founder salary 60K to 120K per year range
- PAR value is meaningless - it's just a plug number
- Post revenue switch to cashflow valuation model
Ensure against red flags in ur cap table
- need to have 10-15million shares outstanding
- smells and feel like silicon valley
- get an attorney who understands Silicon Valley to do it
- east coast versus west coast financial instruments they like
Pre-money and Post Money valuations
- investors are always thinking of post money
- founders are always thinking of pre-money valuation
- talk to investors using post money
- usually 20% dilution per round
- Series C usually leads loss of company control
- ventures usually want a bigger chunk when they come in early
- need to go after increasing valuation
- need to model CAP table before fund raising and share it
- Founders who gave up too much equity early on makes the company unfundable
- Funds older than 5 year old they can't fund new ones
- Each fund last for 10 years
- VCs need to raise more funds to invest
- Watch out for
investors want to be able to convert to common shares results in Full participating
- watch out for liquidation preferences - 2X or 3x
- lesser participation more aligns the investors with founders
- full participating investors will want to exit earlier versus founders
VC method
- Comps / Peer group's revenue multiple to get valuation - need to spend a lot of time to build peer groups and prove the peer group multiplies
- social media valuation is slowly coming down
- which year become profitable = when most likely to exit
- they apply valuation of earliest most likely to exit by 50% discount and then apply risk discount
- in the valley they only care about revenue growth and not income
- SAAS don't make money they are putting money back in the business
- Revenue todos
don't use top down revenue projections
- use bottom up revenue projections
- Need to see where the holes are and try to break it. Need to ensure the valuation is defendable
- projectiond keep rolling down as time passes along and things start playing out
- they will do due diligence
call bullshit and drive down valuation
Further readings
- Essentials of venture capitalism