Model Equity Calculator for Founders with Option Pool Expansion. SeedCamp’s hackathon, Seedhack, took place at Google Campus, London, on the 8th to 10th of November.
It brought together some of the brightest talent in the startup community from 15 countries with one of the best accelerator programs in the world and mashed it up with awesome content providers like Twitter, Facebook, BSkyB, BBC, Getty, HarperCollins, EyeEm, Nokia Music and Imagga. There were a total of 12 teams working on interesting and exciting projects. As part of this hackathon, Ali and Will helped me aggregate resources to help founders better understand the process of raising equity and the impact it can have to their founder stakes. We aggregated resources to help entrepreneurs to understand the numbers and implications of raising money and giving out equity. Valuing a company and calculation its impact on your equity is a very complex and confusing for entrepreneurs as well as being far from an exact science, this is the pain point that we wanted to address. The Option Pool Shuffle. “Follow the money card!”
– The Inside Man, Three-Card Shuffle Summary: Don’t let your investors determine the size of the option pool for you. Use a hiring plan to justify a small option pool, increase your share price, and increase your effective valuation. If you don’t keep your eyes on the option pool while you’re negotiating valuation, your investors will have you playing (and losing) a game that we like to call: Option Pool Shuffle You have successfully negotiated a $2M investment on a $8M pre-money valuation by pitting the famous Blue Shirt Capital against Herd Mentality Management. . $8M pre-money ÷ 6M existing shares = $1.33/share.
Later that evening you review the term sheet from Blue Shirt. If you don’t keep your eyes on the option pool, your investors will slip it in the pre-money and cost you millions of dollars of effective valuation. How do we set the valuation for a seed round? A reader asks: “My question is how do we value a company with no sales?
I understand it’s an arbitrary valuation but is there anything we can possibly base it on? Is there a “default” valuation for companies in a seed round?” We’ll answer this question with some questions (and answers) of our own: 1. First, figure out how much money you need to run at least two experiments* . * Your experiments should be constructed such that a positive result will let you raise more money at a higher valuation. 2. Now decide what percentage of the company you will sell for $100K. For example, let’s say you’re willing to sell up to 15% of the company—that’s your bottom line dilution. 3. The Option Pool Shuffle. Learn Before You Earn: How to Figure a Startup's Pre-Money Valuation.
Q: Why is a company’s pre-money valuation important to investors?
How is it determined, and what other factors should investors consider? Are there online tools that would assist in calculating my venture's valuation? -anonymous A: I find settling on a valuation to be one of the top challenges young entrepreneurs face today. Before I tackle the question, let's examine what valuation is and how it works. A company’s pre-money valuation, or PMV, is its estimated value immediately prior to accepting funding.
Here's an example: Say you want to raise $1 million in financing. In determining the PMV, I often see entrepreneurs spend a lot of time developing financial projections to which they apply the discounted cash-flow method. Instead, an entrepreneur should turn to the angel community, as they have developed methods that are respected and commonly used. Related: How to Raise Real Cash for Your Startup Related: 8 Keys to Sizing Your Startup Funding Requirement. PMV Tool And Pre-Money Valuation Calculator. Startup Valuations: Using Several Methods to Determine the Pre-money Valuation of Pre-revenue Companies. Since the end of January, we have posted explanations of five methods for establishing the pre-money valuation of pre-revenue companies, specifically: The Scorecard Method (January 31, 2011) The Venture Capital Method (February 5, 2011) The Dave Berkus Method (February 14, 2011) The Cayenne Valuation Calculator (February 19, 2011), and The Risk Factor Summation Method (February 27, 2011) Good practice suggests using at least three methods to first estimate the appropriate pre-money valuation and then using those results to finalize the valuation.
The Scorecard Method is my favorite and it can be used as the primary valuation method.