St. Louis Arch Angels
Valuation. Your valuation must fit within our risk/reward expectations for the investment. Typically, we look for pre-money valuations below $2.5 million, from as little as $250K. It takes exceptional situations (e.g., a company with existing revenues or an Internet company with a large existing base of subscribers) to get us to consider a higher pre-money valuation.
Full-dilution. In determining valuation we take into account the effect of all commitments to issue shares, which is called the “full-dilution” number of shares. More specifically, the full-dilution number of shares includes all shares that you would issue if all unconditional and contingent commitments to issue shares were to be given effect (e.g., exercise of options and warrants, conversion of preferred shares, exchange of debt for equity, etc.). Moreover, we expect a reasonable number of shares to be reserved (and counted as part of full-dilution) for filling out the key management slots and for other employee stock options.
Pre-money valuation. The pre-money valuation, simply put, is the value you put on your company before getting the capital you seek. To compute: multiply the full-dilution shares immediately prior to the proposed financing (e.g., 2 million full-dilution shares) by the price/share of the proposed financing (e.g., $1/share) to yield the pre-money valuation ($2 million, in this example). If you add the proposed financing amount (e.g., $500K) to the pre-money valuation you get the post-money valuation ($2.5 million in this example).
Pre-money valuation based on percent of company. Some entrepreneurs are more used to thinking in terms of offering some percent (e.g., 20%) of their company for some amount (e.g., $500K) of financing. Numerically, divide the proposed financing ($500K) by the offered percentage (20%) to get the post-money valuation ($2.5 million), and subtract the money ($500K) from the post-money ($2.5 million) to get the pre-money valuation ($2 million). Note that these are just two different ways to compute the valuation; and hence, as expected, yield the identical results.
Share value vs company valuation. Two valuations are relevant in trying to estimate the return to the investors for their money: future value of shares, and future value of the company. The company is expected to increase in valuation (though it can decrease or stay at the same valuation) given future developments and financings. The shares the current-round investors bought are also expected to increase in valuation (but can decrease or stay the same). However, what is important to understand is that the increase in share value is rarely the same as the increase in company valuation. In fact, the difference between the two increases may be a factor of 3:1 or even 10:1 in highly successful companies, and naturally can be much worse for poorly performing companies.
In the above example (at 2 million shares after the funding at $1/share), in the future there will be two kinds of events that lead to additional dilution for the investor: (1) Additional shares issued (or committed to be issued) due to future financings; and (2) Issuing of shares (or commitments to issue) additional (beyond what was included in previous full-dilution amounts) shares to employees and other non-funding events. In these cases the company’s valuation and the shares’ valuation change in differing ways.
Full-dilution. In determining valuation we take into account the effect of all commitments to issue shares, which is called the “full-dilution” number of shares. More specifically, the full-dilution number of shares includes all shares that you would issue if all unconditional and contingent commitments to issue shares were to be given effect (e.g., exercise of options and warrants, conversion of preferred shares, exchange of debt for equity, etc.). Moreover, we expect a reasonable number of shares to be reserved (and counted as part of full-dilution) for filling out the key management slots and for other employee stock options.
Pre-money valuation. The pre-money valuation, simply put, is the value you put on your company before getting the capital you seek. To compute: multiply the full-dilution shares immediately prior to the proposed financing (e.g., 2 million full-dilution shares) by the price/share of the proposed financing (e.g., $1/share) to yield the pre-money valuation ($2 million, in this example). If you add the proposed financing amount (e.g., $500K) to the pre-money valuation you get the post-money valuation ($2.5 million in this example).
Pre-money valuation based on percent of company. Some entrepreneurs are more used to thinking in terms of offering some percent (e.g., 20%) of their company for some amount (e.g., $500K) of financing. Numerically, divide the proposed financing ($500K) by the offered percentage (20%) to get the post-money valuation ($2.5 million), and subtract the money ($500K) from the post-money ($2.5 million) to get the pre-money valuation ($2 million). Note that these are just two different ways to compute the valuation; and hence, as expected, yield the identical results.
Share value vs company valuation. Two valuations are relevant in trying to estimate the return to the investors for their money: future value of shares, and future value of the company. The company is expected to increase in valuation (though it can decrease or stay at the same valuation) given future developments and financings. The shares the current-round investors bought are also expected to increase in valuation (but can decrease or stay the same). However, what is important to understand is that the increase in share value is rarely the same as the increase in company valuation. In fact, the difference between the two increases may be a factor of 3:1 or even 10:1 in highly successful companies, and naturally can be much worse for poorly performing companies.
In the above example (at 2 million shares after the funding at $1/share), in the future there will be two kinds of events that lead to additional dilution for the investor: (1) Additional shares issued (or committed to be issued) due to future financings; and (2) Issuing of shares (or commitments to issue) additional (beyond what was included in previous full-dilution amounts) shares to employees and other non-funding events. In these cases the company’s valuation and the shares’ valuation change in differing ways.
Create a free website with
Weebly
