The Basics of Startup Valuation

An article we liked from Thought Leader Fred Destin via LinkedIn:

Your startup valuation, explained simply.

Here is a quick tutorial on how valuations and investment rounds work, as simple as I could make it. 

The jargon may sound off-putting but the concepts are simple. Understand the definitions and build the cap table. Ask the investor for their cap table so you are sure there’s no confusion. Compare offers on an apple-to-apples basis by comparing the Price Per Share. Let's dive in. Bonus: a simple cap table you can use

Fundamentals

Angels and Investors will buy newly issued shares in your company. They will invest a dollar amount (say $1M) and buy those shares at a certain Price Per Share (PPS) which is the value of one unit of equity (a share).

Investors look at your existing business and assign a value to it. This value is what is called the Pre-Money Valuation. The Post-Money Valuation is the agreed value of your company + the cash invested in the round.

To calculate the Price Per Share, simply take the Pre-Money and divide by the number of shares currently in existence (# Pre-Money Shares).

Price Per Share = Pre-Money Valuation / # Pre-Money Shares

Here's a super basic cap table with PPS calc:

The Option Pool Shuffle

How many shares exist prior to the round? The answer is less obvious than you might think; it is actually a question of agreed definition ... and a source of confusion. Included for sure are the existing shares and the options that have been allocated. The subtlety is that the total number of shares considered will usually include...

Read the rest of this article at linkedin.com...

Thanks for this article excerpt and its graphics to Fred Destin, Founder of Stride.VC, of LinkedIn.

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