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
