

Ask HN: Valuing a Social Technology startup using EBITDA makes sense? - ashreef

originally asked here: http:&#x2F;&#x2F;answers.onstartups.com&#x2F;questions&#x2F;49770&#x2F;valuing-a-social-technology-startup-using-ebitda-makes-sense<p>We&#x27;re finalizing the details of a new shareholders agreement but we&#x27;re stuck at setting the EBITDA multiple that will get used for future valuation of the company.<p>The agreement was written by one of the new investors (VC). but the other investors commented that EBITDA is the wrong way to calculate the valuation of a social technology startup that has assets like its users, and that should be looking for revenue and market share.<p>The startup could be not generating high revenues, but the numbers of its users for example could be another thing that should be part of the equation as it represents an opportunity and a market share.<p>We&#x27;re confused and don&#x27;t know what is the right method to use. I hope that there&#x27;s a standard for something like that.
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antr
A multiple is a benchmark instrument, not a valuation methodology. A business
needs to be valued via DCF, using a multiple to value a business is a big
mistake.

Let me clarify, e.g. An EBITDA multiple of 8x all it means is that the
company's Enterprise Value is 8x the company's (either FY0 or preferably FY+1)
EBITDA. But the important number here is not the multiple, it's the Enterprise
Value! The multiple is the by-product of the valuation (Enterprise
Value/EBITDA = Multiple), and not vice-versa. By using a multiple you are
potentially omitting the company's future growth, capital structure, increase
in profitability/margins, etc. That is why the smart way of valuing a business
is via DCF. By using a DCF you are able to critically test if the operational
metrics, implied growth, revenues, costs, profitability, etc assumptions are
realistic and achievable. And in the case of a tech companies, one makes sure
that growth (where a big chunk of value is) is factored/priced in.

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ashreef
As you said, I think DCF would be the right thing to do. we already did the
valuation for this round of investment using DCF. so in future calculations of
valuation, it would make sense to use DCF again.

The current draft of the Shareholders Agreement currently says that EBITDA
should get used if there're revenues, but if there are no revenues, DCF should
get used.

I think we will just amend that by removing EBITDA, and forcing the use of DCF
in all cases.

