

Ask HN: Day Zero Valuation - khangtoh

We're at stage of getting another cofounder for our startup ( yes, we did applied to YC and did not get accepted ). The potential cofounder is interested to work for equity but wants to know what our zero day valuation is.<p>Since we have not launched but have various pieces of software coded, site design, web app's interface designed and coded. How would you come out with a valuation at this point?
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nostrademons
The question's basically meaningless - startup valuation is fuzzy enough when
VCs invest after launch, revenue, sometimes profits. How could you come up
with a number before you've even launched?

I suspect that the prospective cofounder is trying to figure out how much of
the startup he will end up owning. He knows how much he is worth in dollar
terms; divide that by the present value of the startup and you get the
percentage of ownership that vests per month/year/whatever. So if his present
salary is worth $100k/year, and the startup is currently valued at $1M, and
his shares vest over 4 years, and the startup's value remains constant over
those 4 years (unlikely, but for the sake of calculation...), he's thinking
he'll get 40% of the company.

This is an incredibly awkward way to think about valuation and equity splits.
If this is really his concern, I'd say just make him an offer for the
proportion of equity you're going to give him. It should be based on how much
he'll improve the startup's chances in the future, not on some made-up numbers
for present salary & valuation (which is basically meaningless). So if you
think he'll contribute as much as you guys will, and he's crucial to the
startup's success, give him shares that are nearly equal to yours. If you
don't think that, I'd suggest not bringing him on as a cofounder at all rather
than trying to work out some lower equity number. Don't worry too much about
what you've already done: trust me, the vast majority of work is ahead of
you...

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gojomo
As nostrademons suggests, 'valuation' is likely the wrong question, and you
should just skip to what is probably the real motivation for the question,
relative equity splits.

But if valuation really is the question: be careful about setting it high
before you formalize and restricted/time-vested stock shares. For certain tax
purposes (83b election), it's helpful if the shares are handed out at a moment
when they are really cheap. Then the founders can buy them at fair value, do
the 83b election, and all subsequent appreciation/vesting triggers no tax
liability until the shares are eventually sold.

(A good reference on 83b elections:
[http://www.startupcompanylawyer.com/2008/02/15/what-is-
an-83...](http://www.startupcompanylawyer.com/2008/02/15/what-is-
an-83b-election/))

