Startup Valuation: How to Calculate It - Startups 101

Startup Valuation: How to Calculate It - Startups 101

Early Stage Valuation - Intro (00:00:00)

  • Investor Finder service offers weekly investor matches for startups
  • Valuation is complex and varies across friends & family, seed, or Series A rounds
  • Friends & family rounds typically see investments from $10k to $200k with valuations from $500k to $1m

Early Stage Valuation - Friends and family investors (00:01:07) and Angel/seed round (00:02:40)

  • Friends & family often invest due to personal connections, with valuations at $500k to $1m
  • Risk is high at this stage, leading to low valuations
  • Convertible notes or SAFEs are common to delay valuation discussions
  • Angel investors may invest $50k to $2m, typically for 10%-20% equity at valuations between $1m to $3m
  • Convertible notes or SAFEs often used during angel/seed rounds

Early Stage Valuation - Convertible Notes (00:03:39) and Cap and discount rate (00:04:52)

  • Convertible notes turn into equity at a "qualified financing" round
  • Discount rates, usually around 20%, reward early investors
  • Valuation caps set maximum valuations for the next equity round
  • Valuation often inferred from the cap when raising funds through convertible notes

Early Stage Valuation - SAFE (00:05:37) and Valuation (00:06:11)

  • SAFEs are founder-friendly with no interest, maturity date, or repayment
  • Include discount rates and valuation caps
  • Choice between convertible notes and SAFEs can impact startup valuation and risk

Early Stage Valuation - A few things to consider (00:07:00) and Founder Vesting (00:08:30)

  • Stock option pool replenishment can dilute founders or all shareholders

  • Extra rights or restrictions, like investor approvals for large expenses, can affect control

  • Liquidation preferences can be a critical term, with 1x being standard

  • Lower valuations may be acceptable with better terms

  • Founder vesting ensures founders stay engaged post-investment

  • Terms can get complex, requiring experienced legal and financial advisors

  • As startups approach Series A, valuations become more formulaic based on the amount being raised

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