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May 16th, 2012 One of the more contentious things in the negotiation between an entrepreneur and a VC over a financing, particularly an early stage financing, is the inclusion of an option pool in the pre-money valuation. As my friend Mark Pincus likes to say, “it’s just another way to lower the price”.
I’ll accept that critique. And take it one step further. The option pool is absolutely a piece of the price negotiation. But it is a very important one as I’ll explain.
But first, let me lay out a few things for those who aren’t well versed in these matters. The
. . . → Read More: Valuation and Option Pool — Understand the trade off
May 16th, 2012 I just returned from the 2011 Angel Capital Association Summit in Boston, April 4-6, 2011. It was attended by over 500 angels and associates, including about 60 international angel leaders. It was an excellent meeting – the best yet of the half-dozen or so US ACA angel Summits to date. On Wednesday afternoon, I was fortunate to be asked to facilitate a roundtable discussion entitled: “Valuation of Pre-Revenue Companies and Irrational Exuberance” attended by 50 or so delegates. We reviewed the following chart based on an informal survey I conducted last summer: 2010 Angel Valuation Survey
. . . → Read More: Current Pre-money Valuations of Pre-revenue Companies
May 2nd, 2012 One of the common areas of misunderstanding, and therefore conflict, in financing negotiations has to do with the relationship between the pre-money valuation and the option pool.
Investors want the company to have an adequate option pool for future hiring and it is customary to include the pool in the pre-money valuation. Some entrepreneurs see this as nothing more than a veiled attempt at lowering the value of the company. Well, yes and no. No in that investor aren’t actually lowering the value of the company as the option pool is net new–it comes on top of what they value
. . . → Read More: Option Pool, Post-Money and True Pre-Money. Trade Pool for Valuation.
April 17th, 2012 This is a Youtube video explanation of a cap (capitalization) table example that is available online. It may take a while get your head around the terminology and concepts involving the option pool and note conversion, and their impact on valuation. It is worth taking time to understand this if you want to see how the option pool and valuation can be played off against each other. Entrepreneurs need to understand this if negotiating with investors.
. . . → Read More: Venture Hacks Series A Cap Table, with Note Conversion and Option Pool
April 16th, 2012 A revenue-based finance (RBF) investment provides capital to a business by “selling” an ongoing percentage of a company’s future revenues to the investor. For simplicity, you can think of it as a revenue share type of arrangement. Investor gives capital to company in exchange for a small percentage of gross revenues. RBF lives as a hybrid of bank debt and venture capital. This kind of financing has been around for a while in non-tech industries such as mining, film production and drug development, but it’s recently been gaining traction in the world of growth finance and early-stage techno
. . . → Read More: Revenue Based Financing — often non-dilutive to founders, no valuation impact
April 10th, 2012 Since the end of January, we have posted explanations of five methods for establishing the pre-money valuation of pre-revenue companies, specifically:
- The Scorecard Method (January 31, 2011)
- The Venture Capital Method (February 5, 2011)
- The Dave Berkus Method (February 14, 2011)
- The Cayenne Valuation Calculator (February 19, 2011), and
- The Risk Factor Summation Method (February 27, 2011)
Good practice suggests using at least three methods to first estimat
. . . → Read More: Startup Valuations: Using Several Methods to Determine the Pre-money Valuation of Pre-revenue Companies
August 31st, 2011 Q: Say I have an angel (SEC accredited) who’s ready to invest at an amount well below $100k. How would this impact on a future round with VCs? Is there some standard or average pre-money and post-money that happens in angel deals? Also, the angel in question is a family member of a friend, so would it be better to have them invest as a family/friend financier rather than an angel, and how exactly would that work? A: (Brad) Let me address the last question first. There is no real difference between a “family/friend” investor and an “angel” investor other than semantics. Structurally….
. . . → Read More: How Does A Small Angel Investment Impact a Future VC Round?
February 8th, 2010 It has fallen upon angels to educate entrepreneurs about the realities of compressed valuations in today’s economy, especially since VCs are supporti
. . . → Read More: Angel Capital Education: Ask an Angel: How Can Angels and Entrepreneurs Improve the Valuation Process?
July 13th, 2009 What’s the biggest mistake an entrepreneur can make? According to Jason Green, Founding Partner at Emergence Capital, it’s responding to the questi
. . . → Read More: Setting your company’s valuation | VentureBeat
October 19th, 2008 (Note: the best way to use this valuation estimator is to answer the questions, see the valuation, and then change an answer or two to see the effect
. . . → Read More: High Tech Startup Valuation Estimator
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