
What is the valuation of my company? - Peanut

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nickb
Do you have a vesting schedule? No?

Quite simply, company is worth present value of future cash flows. Is the
company profitable? If not, it's worth zero. It doesn't matter how much money
you've put in and how much sweat was put in and how much opportunity cost was
sacrificed... that's all sunk cost. If you're not profitable and have no
revenues, you're worth zero and that's where you should start your negotiation
from.

~~~
pg
The value of any company (new or established) is the expectation of its future
profits.

It's harder to estimate the future profits of a company that isn't profitable
yet, but that doesn't mean the company is worth nothing. In fact, there is a
whole industry based on buying the stock of newly founded, unprofitable
companies. It's called venture capital. Its leading practitioners are all
extremely rich, which they would not be if their work consisted of buying
stuff that was worth zero.

~~~
nickb
Paul, that's speculative investment valuation or the valuation for the
purposes of speculation a.k.a. the VC method:
<http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=288006>

In a court, judge appointed assessor would not use VC method but would instead
instead use NPV method to value a company. As you know very well, there's a
lot of risk and uncertainty associated with startups and it would not be
prudent, for a judge, to value something based on the VC method since court
decisions work the opposite: on minimization of uncertainty. Clearly, the
poster is looking for a valuation that would arise if his case ended up in the
court.

~~~
nostrademons
Uh, no. Discounted cash flow analysis is pretty much standard throughout the
investment world. It's used to value just about everything, from startups to
blue-chips to bonds to real estate.

You and PG are basically saying the same thing: NPV _is_ the expected value of
all future profits, discounted back to the present by the risk-free rate of
return (normally taken to be the interest rate on T-bills). You're assuming
that profits will remain constant, though. In most cases, this is not a valid
assumption. Even big companies like Coca Cola have some earnings growth
factored into their stock prices.

There is, of course, risk in trying to predict future profits. But there's
also risk in assuming profits will remain constant (as I rudely found out when
I invested in a stock with a P/E of 9, only to see it lose money the next
quarter). That's why financial analysts get paid big bucks.

The only company that's worth zero is a bankrupt one. Sometimes not even then
- many bankrupt companies still have a residual market cap because investors
expect them to emerge from bankrupty and continue operating.

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Peanut
Say I've put in $50,000 to the company as the founder and I own half of it (I
hold 50% of the issued shares). The two other founders have 25% ownership
each, all sweat equity since I'm the only one putting up cash.

What happens if one of them decides to leave? What is our stock valued at and
how much would it cost to buy it back from them?

~~~
pg
It depends how much of your stock was in return for the money you put up, and
how much in return for your work as a founder. If your work as a founder was
worth zero, the valuation of the co (at the moment you invested) would be
$100k, since you bought half of it for 50.

In most startups you don't have to buy people out if they leave (in the first
year) because most startups have vesting with a one-year cliff. I.e. none of
the founders get any of their earned stock till they've worked for a year.

~~~
Peanut
We had a little chart that weighted the monetary contribution to 25% with
sweat being worth 75%.

(Did a quick calculation, not sure if it's right... does this mean we're worth
$400k??)

The reason why I'm asking is because I'm trying to convince the others that
vesting is INDEED necessary since I'm worried that someone could just pull out
and we'd lose all our startup funds in order to buy the stock back.

Our lawyers are apparently too busy to answer these questions because I've
asked them and they haven't been any help at all. PG and others, if you can
point me in the right direction that'd be great.

