
Ask YC: How To Value Your Non-Launched Company - pepeto
I guess you really have to have experience with angel investing for this one...<p>I know everybody is here is fan of 'build it yourself' but while building it I have this business plan and with my partner decided to go around family friends and other potential investors for investment. same question comes up again and again - "How do you value the company? You did you decide to ask for X percentage for that money you requested? You have no earnings and so you can't use a ratio to value your company at Y."<p>I know the 1/(1-n) equation which tells me how much it's worth to me and is basically the bottom line - not where I should start the negotiation.<p>Somebody suggested that maybe I should have a formula such that the investors have a better deal but I have the option to purchase some of the shares back upon completion of some of the steps of development. Makes sense, but is this even done?<p>So I am still in search for a way to determine how to present such a financial request to potential investors.<p>Any insights?
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tonystubblebine
I think people often structure the investment as a convertible loan
specifically to avoid this question. The conversion part is that the loan
converts to equity (with a discount) based on the valuation set during your
series A. This way you don't have to come up with a make-believe valuation
right now.

If you don't ever get to series A your company will either have to pay off the
loan with interest or go out of business.

CRV offers this as part of their quickstart program and is very open about the
terms. It's a good place to find out more.

<http://www.crv.com/quickstart>

"A standard interest bearing loan will be made to a corporation, which we will
help you establish if you do not already have one in place. CRV will not seek
a personal guarantee and will not hold you personally responsible for repaying
the loan.

The loan converts into equity only if and when your company closes its next
round of funding (typically a Series A round). If the company successfully
raises its next round, in exchange for sharing the risk with the entrepreneur,
CRV receives a discount on the conversion price when the loan is rolled into
that next round. The discount will be a maximum of 25% (determined ratably at
five percent per month, depending on how long it takes to close the financing,
up to the maximum) off of the per share price. "

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gojomo
Valuation is arbitrary before there are financial or other metrics with which
to reason about comparables.

How much can you ask for with a straight face? How much do you need the money?
(What's your 'BATNA'?)

Be honest about the prospects of losing all the money, and your hopes for
making a lot. (With friends and family, be especially clear it could all be
lost without recourse.)

If you trust your profit projections -- or at least the relative likelihood of
different good, middle, bad scenarios -- you can do a discounted cash flow
analysis, weighted by the different outcomes. Of course, it's all fantasy, but
it's a way of deriving a bottom-line valuation from some numerical
assumptions, and then you can argue about the assumptions.

You certainly can have contractual terms which give them first claim on
dividends up to some rate, or where their returns are capped at some
cumulative return, or where you have buyback rights at predetermined prices,
and so forth. I think these are more likely when the outcomes are better
understood -- for example when entrepreneur and investors are known qualities
in a predictable market.

With something highly speculative, a vanilla "you have X% of the venture, boom
or bust" may be safer, and less likely to make things weird if you later
pursue more institutional investments.

Also: be sure to understand 'accredited investor' rules (or the equivalent in
your jurisdiction, if not in the US). Don't skimp on good legal advice.

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ucdaz
1\. Build the idea and take it as far as you can without any outside
investors.

2\. Once you're out of money and your business is more mature, you will have a
better idea how much your company is worth.

3\. You can now negotiate with investors.

Advice: Don't worry too much about the finances. Focus on building a great
product first. =)

