

Valuation the easy way - drewcrawford
http://blog.experimenthouse.com/2008/07/valuation-easy-way.html

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flipbrad
Very good post. But I was wondering how you value your ideas up front? Also,
any scope for going back and revaluing it (e.g. if it brought in much more
revenue than expected, with little work required i.e. little dilution) during
your regular valuation meetings?

I'd be interested to know, a year down the line, whether these frequent
meetings ultimately were a productive and motivational use of your time? On
reading your article, it certainly seems like a good way to do things, but
it'd be nice to have it run its course and then view it in retrospect!

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drewcrawford
As far as valuing ideas up front, we plotted them at discrete points in the
creative process. There was one particular "critical" meeting we used early on
as a landmark, because a lot of our product ideas came out that day. We would
ask ourselves "what % of our value was idea X before that meeting?" Then we
would extrapolate it to a year out, to see if the slope of decay looked right
to us. With some linear interpolation, we came up with a number along its
decay line that represented its value today.

Revaluing things retrospectively isn't something that we've talked about yet
but it's certainly a space for further exploration. I think our hope is that
there will be enough time delay between someone proposing an idea and its
valuation that we'll have some actual customer data or feedback that we can
evaluate.

As to the long-term viability of our system, only time will tell :-)

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webwright
FWIW, PG seems to believe that there was a correlation between people who
spend lots of time/energy/thought on stuff like this and failure.

I think you'd get similar value by setting an initial partnership allocation
(50-50 or 33-33-33 is best-- if they don't bring equal value, find a partner
who does), vesting it over 4 years, and meeting every quarter for a "Do we all
feel like everyone's holding up their end?" meeting.

~~~
drewcrawford
I suspect 2.5 hours is far less time and energy than most startup founders put
into allocating shares. It's not something that we spent weeks or months on.
We actually spent more time blogging about it than doing the actual
allocation, and I think the increase in productivity associated with happy
hackers was a net win.

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neovive
Interesting article. Although, I'm not sure about the following statement:
"Entry-level developers seem to make about 75k-90k a year in most places."
That's seems to be a bit overestimated, at least for an entry-level web
developer.

~~~
drewcrawford
It certainly seemed to be the case for the particular hypothetical developers
we would be hiring (the specific languages and technologies we use).

Your mileage may vary, but the general concept (paying market rates) still
holds.

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mikeryan
Who do you do these monthly valuations with? Investors? Co-Founders?

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drewcrawford
Obviously the part about valuing the work was referring to work performed by
the founders.

Investors were involved in the process as well. It is easy to "value" an
investment--it obviously already has number associated with it ;-)

I can obviously forsee issues arising if investors are not on board with this
sort of valuation system. We were able to dangle the carrot of giving them
some additional rights in our operating agreement, which seemed to make them
happy.

~~~
webwright
Um yeah-- valuation (as most people refer to it) is the process of valuing a
company. And no-- valuing an investment doesn't have a number attached to it
until you negotiate one (which is the hard problem that PG refers to). If I
invest $100k in your company, sure-- I've invested $100k. But at what
valuation? Is your company worth $1m post-money, thus giving me 10% ownership?
Or is it worth $200k post-money, giving me a 50% stake?

That's the hard part.

Regarding investors not being on board... I'd go a bit farther and say that
your system is likely a fundraising death-sentence unless you are already a
runaway success who can make the rules. No one is going to invest in a company
with a shifting cap table and no formal vesting.

I'm all for innovation, but I don't think you're buying anything here other
than additional risk. In this case, the convention method actually works
pretty well.

