Are you into fundraising? Or trying to sell a part of your startup to an investor? Either way, you must value your startup to figure out a fair price for the equity sale. It all depends on the money you take out for your business and investments. There are many approaches that you can follow for startup valuation.
It means earnings before interest, tax, depreciation, and amortization. It is the annual profit that you can think of now. If your startup is generating $1 million in profit, then you can use your startup at $4M. If the investor wants to sell 25% of the company, then the investor would pay you $1M as the owner. And, they would receive 25% of the stock. These multiples can vary as per the size of the business. It also depends on the growth opportunities and many other factors. It’s more common with the service businesses. The valuation is based on the efficiency of the organization to generate revenue. Keeping the costs low is another important factor. That’s how the early-stage startup valuation takes place in startups.
Are you wondering how to calculate the valuation of a startup? It’s common in the software startup world to calculate valuation based on growth. It can also be based on revenue. That’s because the startups grow rapidly with all their cash usage. They grow even faster without any profits, sometimes. To calculate early startup valuation, you can multiply revenue by the multiple. The multiple is the bargaining price between the parties. It’s based on the startup growth rate. A startup with 40% of growth receives a multiple of 6 to 10. Whereas a startup with 10% growth receives only a multiple of 1 or 2. If there’s high growth, it can drive up the value of your startups too! Valuation is an intricate topic and it all depends on your overview of it. Some organizations would charge thousands of dollars for startup valuation. For some transactions, it might be important, but not for all.
Did you know that calculating value is difficult if there’s no revenue generated? In such cases, a convertible note is always used. It’s a loan that converts equity for the loaner into the future. This allows valuation to be put off until a series of financing occurs. It’s done to determine valuation quickly. Convertible notes are cheaper than the legal fees of startup valuation. There are many benefits of valuation with convertible notes. These notes are cost-effective for the early startup valuation. Convertible notes offer interest rates and a conversion discount with their valuation caps.
SAFE Agreement created by Y Combinator can be downloaded online. It’s similar to convertible notes but they are not loans. Plus, they don’t accrue any interests. They are easier and simpler to implement than convertible notes.
Hopefully, all the above have given you a better understanding of startup valuation. These will help you in building a great startup. You won’t face any trouble finding investors!