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Things To Consider Before Your Startup Valuation Math

Written by: Magnus Ernegard, Executive Contributor

Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.


Congratulations! You and your team made an excellent impression on the Business Angels with your compelling story at your recent pitch. As the investors now would like to continue the discussions, which hopefully will end up in a term sheet, it is a good sign. It means a lot is right. But what happens now?

Referring to my last article in BRAINZ Magazine, "What A New Entrepreneur Should Think About When It Comes to Raising Capital", we continue with the Startup's valuation. This article aims to provide a brief insight into what to think about before making a valuation of your promising, fast-growing Startup as a relatively new entrepreneur.

The most critical or at least one of the most crucial decisions to decide upon is what your Startup is worth? What value of the venture you founded before any capital injections from the investors are made, i.e., what amount do you have as pre-money valuation?

So, let us first clear out what to think about before calculating and establishing a valuation of your Startup?

In general, Startup founders benefit by delaying placing a value on the Startup. Without having achieved meaningful accomplishments, pricing the venture often disadvantages you as a founder. But as your venture progresses, launches the products/services, adds new customers, and has some traction, it reduces the risk of the venture. The risk reduction adds value to the Startup, and at each funding round, the value should be growing.

The Startup value ultimately revolves around cakes – do you want to have a larger slice of a smaller cake or a smaller slice of a larger cake? You know that equity capital requires you to give up part of your Startup venture with a dilution as a consequence. On the other hand, you can grow the company faster with cash, increasing the enterprise value. So, besides getting funding support from professional Business Angels, which probably has an extensive and knowledgeable network, industry knowledge, and experience, the Startup will also likely increase the valuation.

This simple example shows the progression of the founder's declining ownership percentages (dilution) and increasing valuation as the Startup is growing and raises more equity. And thereby, the founder's portion moneywise of the ownership is worth more.

But before you struggle with how much equity you are willing to give up by adding another owner, we at BridgeToAngels suggest most Startups considering other funding structures.

This could be a convertible debt, where the investor makes a loan to the venture. That loan converts into equity in the future, often in conjunction with a funding round, perhaps at a later seed-round stage or Series A round.

When you have paying customers and generate revenue, debt financing becomes easier to account for as you will know your repayment terms and commitment ahead of time to plan accordingly. There are also some other reasons we suggest a convertible debt arrangement. This includes speed and a less complex funding structure with fewer deal points to be negotiated. You delay the valuation, which in most cases are beneficial to the entrepreneur, lower legal fees for the paperwork, and make a rolling raise structure, where you can close smaller portions of the notes over several months in an easier way than equity funding. Further, if you are profitable, debt could give your Startup tax-deductible, but also that a lender usually will not get involved in the operation that much as long as you pay back on time.

But I would also like to address different opinions if this debt model has disadvantages for the entrepreneur (and the investor), like if conversion triggers don't happen. If the convertible note is approaching the maturity date and the Startup cannot close the equity deal, a renegotiating might be necessary, which might not be in your favor. In general terms, the notes are likely to be undesirable for the investor as there is no valuation, and they don't know exactly how much equity they get for the cash. In your early growth years, it's essential to be aware of all your funding options, so bear in mind what you pick today, determining how you can run your Startup business in the future.

Whatever reasons there are for delaying a valuation from the equity investor discussions in the funding rounds, deciding on a valuation should be made beforehand at other events or milestones.


You have to set a value on your Startup when discussing the equity split among co-founders (if there are any). Before entering discussions with outside investors, you should explicitly agree on who owns how much of the new venture? This will then be the base for a start building the cap table.

Apart from the total value of the Startup, the equity split between the founders needs attention. You must decide if one founder is more experienced, does that then warrant more equity? What if one of the founders can bring more money to the Startup? Should they get more equity? Will you work full time, or will anyone have other commitments? At what times will you work. Evenings and weekends might work better for one while the other wants more normal office hours? Is the intention that you, as founders, will invest the same number of hours per month in the company? Does the founder with the core idea for the Startup get more equity?

Here we strongly recommend establishing a partnership agreement between you to describe how you perceive the collaboration is intended to work. Involve an experienced business lawyer early in the process. BridgeToAngels are cooperating with some in the Nordic region, which specifically are dealing with different kinds of Startup agreements.

It is also essential to write down who is responsible for which tasks and areas in your partnership agreement. It could, for example, be that one of you wants the Startup venture to be your life project while the other wants to scale it up and then make an exit after five years.

Who decides what and who signs for the company? Who is the CEO? He/she is the one who has the last word and is the one who foremost represents the company externally in contact with customers, suppliers, banks, governments, and the media.

All these should boil down to an equity split agreement. Should it be 50%/50% or 65%/35% or 87%/13% or 66%/19%/15% or whatever the split in percentages is agreed upon?

Is it okay for one of the co-founders to quit and start a fully or partly competitive business? If not, regulate this in a non-compete clause.

Stock Option Pool

Another occasion you have to set a value of your Startup is when you set up a stock option pool. This is to reward early employees for taking on the risk of joining your Startup and offset lower than market rates for salaries and other benefits, which often is or will be the case. A stock option pool plan is also, for many investors, a prerequisite for the funding, at least in the later stages when dealing with VC firms. Even if this does not directly influence the Startup's valuation, they are calculated into the number of fully diluted shares outstanding and affect ownership percentages of all shareholders. This we will come back to later.

Angel investors' food for thoughts before valuation exercises

So, what kinds of factors floating around the head of an Angel investor to come to a fair value?

Different methods and models can help estimate the value at an early stage depending on the type of investor. For example, some are more interested in strategic values, and some look into how comparable companies are valued. Others prioritize early cash flows, and others use all available methods to average the valuation results. Anyway, there is no fundamental value but, instead, something negotiated and agreed upon between the involved parties.

Let's start structuring the factors into four areas an Angel investor could consider:

  1. Deal factors

  2. Startup venture's factors

  3. Macro environment factors

  4. Local environment factors

1. Deal factors

Will the investor get preferred share rights that do not make the investment deal risky for her/him? ( In short, these rights protect getting paid back first before the common shares. Typically, the founders and employees get paid last. The preferred might include liquidation, participation with or without a cap, anti-dilution prefs or voting rights, and drag-along rights)—more about that and what should be included in a term sheet will come in an upcoming article. The investor is also likely considering the stage of development the Startup is at: the ideathe idea, product development, customer's testing, or beyond? How much money has up to now been invested in your Startup? How much time in terms of research and development and innovation has been accumulated? Does the Startup need more capital in any upcoming funding rounds, and how much and when? Any plans for an exit?

2. The Startup venture's factors

What about the founder/-s' and team's credibility? It is almost always about trust at the early-stage phase. There is a high degree of uncertainty related to product, market, and business model. Therefore, the founder/-s' and team's credibility is a crucial and essential factor, and perhaps the most important factor of them all. The Angel investor is considering any previous experience, perseverance, and being able to present a credible, reliable implementation plan and, of course, the energy of the strong-willed founders and team. The personal chemistry and trust between you as the entrepreneur and the investor are, of course, essential as you will be close together for the next 3, 5, or perhaps ten years. Building trust is, as I mentioned, the most important factor, and it takes time to build, so start now by reaching out to potential investors who know the industry and have a solid network. And not then and only when you need the financing.

Is the problem or need you will solve significant and fundamental? How big is the market your Startup is going after today, and will it grow and scale in the future? Do some players already dominate the market? Does your Startup have a significant way to differentiate itself from the competition? What does it cost to conquer a substantial part of the market? Does the Startup have IP (patent, trade secrets, trademarks) or other competitive advantages like a team member's unique skills?

Many investors see the most robust measure of traction as the Startup having paying customers. It shows how the product works both for the customer group and willingness to pay in the most precise possible way.

Sometimes capital is needed before it is possible with paying customers. Think then through and create a list of all accomplishments you have made since the start of your venture, e.g., a statement from customers you have met, a letter of intent with a potential partner, a development agreement with a significant market player. It could also be information about hiring experienced team members, signing up paying customers, launching an early version of your product/service, filing for IP, etc.

Different investors interpret figures differently, but as s a rule of thumb, many investors are only interested if there is a potential to earn ten times the money in 5 years. They then want the projections in the financial plan, the team-building plan, and the growth strategy to support this. So, being an exciting Startup having a high degree of credible scalability is a must.

Your business model is vital in terms of both the degree of innovation and the so-called product-market fit. Perhaps a subscription model is the best for your Startup, or you prefer the customer to pay through direct sales or a freemium model or credit sales, or could a franchising model be an alternative or perhaps a hybrid of different models?

Other areas deciding if an Angel investor is willing to open the wallet could be they might not only see the investment from a possible high profitability perspective as VC companies more likely do. The Business Angel might be equally or more interested in a venture with a solid and pronounced commitment to sustainable investing, e.g., ESG ( Environment, Social, Governance) ventures, which will likely be highly profitable as well, at least in the long run.

3. Macro environment factors

What is the current economy like? How is the stock market developing for listed companies? Is there much money out there together with low-interest rates? Are there any other attractive Startup options for the investor's money? Is there a risk/opportunity for any political decisions or new regulations that either could benefit or making it more difficult for entrepreneurs and smaller ventures to develop? Is the market and sector of the Startup growing or shrinking or at a stable level? Are there industry trends like AI or cloud-based services that could either hurt or help the prospects for your Startup's success?

4. Local environment factors

Early-stage funding is very often local, so closer to home is more likely to succeed at the first rounds.

Is there a large and well-functioning Startup ecosystem and community in the area where the founder/-s and team could develop and prosper? Have any similar Startups in your area successfully raised funding, and are there other ventures similar to yours that have recently made an exit, which is a huge validation for many investors? How many are investable and high-quality Startups competing for funding in your area?

The above are only some examples the investors consider when deciding on an investment. Having good order and structure with the documents and knowing the figures and assumptions like the back of your hand are more or less mandatory for getting financing.

Keep in mind experienced Angel investors have most likely seen many deals. They have a general expectation of how similar ventures are valued, so you should have a gut feeling if your Startup might be over-or undervalued.

Final Words

Of course, you should be optimistic as an entrepreneur, but being over-positive with your financial forecasts and valuation could be a considerable disadvantage. What will the consequences be for you if you fought for high a valuation as possible, and now you as a founder have to accept an equity valuation lower than the previously established valuation? That is a down-round. In other words, your Startup venture is worth less than it was at the previous investment round. This could be because you have a too high monthly burn rate coupled to delayed and not reached the planned milestones, another Startup has developed a more competitive product, or you are too early for the market. If this entirely realistic (nightmare) scenario happens and you are getting more diluted through this down-round, then be aware of how to deal with your team's and, of course, your motivation and morale to follow through and get back on track.

Until next time. Keep on Starting up!

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Magnus Ernegard, Executive Contributor Brainz Magazine

Magnus Ernegård has over 30 years of senior management experience from different industries in multinational industrial companies in various countries. Background in CEO positions, CFO, management consultant, production, business development, innovation, corporate governance, and entrepreneurship. Further, he has, over the years, gained Board and Chairman experiences from Boards within the Automotive, Logistics, IT Consulting, and Textile industries.

Today, he is the owner and founder of the Startup support provider company BridgeToAngels based in Sweden and Denmark.

Magnus has a proven track record in starting/ developing businesses, company split, corporate exits, and organizational effectiveness.

Magnus also serves as Advisory Council Member of Gerson Lehrman Group.

He holds an MSc from the University of Lund, Sweden.



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