How do I correctly compute startup valuation?
I and a partner are starting a new business with several paying customers and estimate the total value of the business based on earnings to be $2,500,000. An investor is interested in making a $250,000 investment. I understand the premoney valuation here would be $2,500,000 and the postmoney valuation would be higher. My question is: Do we assume there are 100 shares in the company to start and therefore the investor would get 10 shares, or 10% of the company to start? In other words, do we base the investors percentage ownership on the premoney valuation alone?
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@pallen123 That is how I know valuation to work. Yes, the investor would own 10%.
Unless the money is remaining in the company. In that case, he’d get 1/11th.
I haven’t been schooled in what you’re attempting to do, but I would say that an assessment of risk is in order.
You don’t say what kind of investment in the company – startup and operating capital until you can begin to generate the actual revenue you project – will be necessary, or for how long. Your idea, talent and expected hard work will be worth a lot, obviously, but without capital it could be worth nothing.
The investor may deserve a much larger stake in the business than you have calculated based solely on (projected) earnings. Without answering directly, consider how much capital you and your partner are putting up, and weigh that against the cash infusion from the silent partner.
There’s a lot of value in someone else assuming all or a large part of your financial risk.
Projected earnings are just that. They are not real until the money is in the door. How much are you and your partner risking?
A dollar is never worth more than it took to make it so.- A. Lincoln.
How do you come up with $2.5m? Is your company likely to grow at a consistent pace? Growth companies can command many multiples on earnings. The standard is 10–15 for consistent and reliable earnings, maybe up to 20. This is just a rule of thumb, however, and many companies in the stock market trade at less than this (currently), and those that are expected to grow very fast can command upwards of 40,50 times earnings.
I don’t know about the question you actually asked, however =/
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