Early Stage Valuation

Introduces some of the terminology, the Basic Valuation Equation, and perspectives on valuation from the entrepreneur's and investor's standpoints.

And here is the spreadsheet presenting the Startup Valuation Explorer referenced early in this video. 

Discusses some of the pitfalls that entrepreneurs can find themselves in by making "rookie" mistakes early in the financing lives of their ventures. These mistakes, however slight they seem now, can grow into big problems for you the entrepreneur because you could (1) overvalue your firm early and scare away later investors or (2) give up too much equity too early and ultimately dilute your ownership percentage to the point you've lost control over your venture or (3) create unnecessary headaches  for your early investors and yourselves when you try to raise later rounds of funding, including the prospect of a "down round" (see below) that carries a bigger dilution risk to your and your early investors' ownership of the company.

Following the "never raise more than half your pre-money valuation" advice is a great rule of thumb to follow, but it should not be your go-to heuristic for exchanging shares for capital. In this stylized example the founders build up valuation through generous offerings to their investors. They're about to run out of authorized shares, which by itself is not that big a problem. But if they have to authorize an additional, say, 10,000,000 shares and issue those, they'll soon be minority owners of their own venture.

It's not just rookie mistakes that can lead to down rounds. Sometimes the overall market for private equity issues can approach the breaking point of a bubble. Here private equity investors wring their hands over the possibility of a downturn in valuations for their unicorn investments. This video provides some insights into their psyches, concerns, (and offices) in the face of market uncertainty. So get on your hamster wheel and shred the tread. Seriously, as a founder if you sense an imminent downturn in the economy or your industry go out and raise at least 18 months of cash to support operations to avoid (1) running out of money and (2) the despair of the down round. 

Description: Are we in a downturn? A softening? A “dry bubble”? As companies accept flat to “down” valuations to stay afloat, venture capitalists are getting nervous. And as many unicorns continue to stay private, public investors grow chagrined. Professional investors who are both hesitant and optimistic share what it’s like to balance both greed and fear in an increasingly uncertain market. TechCrunch, 2016

Existing investors get diluted AND see the value of their ownership decrease. Watch your cash burn rate and hit those revenue targets!

Google sheet: Cap table for down round

Introduces and discusses different early-stage pre-money AND post-money valuation techniques. The emphasis in the pre-money techniques tries to monetize the value you've created in your startup - you should get credit for that! The post-money techniques emphasize the investor's perspective we discussed in the 'Early Stage Valuation 01" video - they're focused on how much of the company they get for their investment. Use them both to calibrate your judgment of how valuable your new venture is before approaching investors!

Option pool impact on valuation; you'll need to negotiate how many shares of stock to set aside for employee stock options before you get Series A money. This video talks about how "True" pre-money valuation works and some remedies for dealing with it as a founder.

Supplemental

Copperpod Intellectual Property. 2020. Startup valuation: How to calculate what your startup is really worth? January, 2020.

Seraf-Investor.com. Approximations, Assumptions and Aspirations: Methods For Valuing Startups [Part I].