Valuing a new Start-up venture for purposes of investment is probably one of the hardest exercises you can undertake. I was speaking with a new Angel investor (who happens to be a business digital consultant) last week on this very subject, as he works with these younger companies quite often. My first question (knowing that these young firms are usually very restricted on cash for outside consultants) was do they ever try to pay you in equity/stock?

He said yes… with great frustration! His angst came from not knowing how much to ask for since he had no way of valuing it.

Without a sales track record (pre-revenue) or track record…even harder. For a deep dive and to save you from falling asleep, Investopedia does a good job here: https://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp.

What I wanted to do was add some nuances and key points that Grace Century, and my JV, Oggi Equity do; to try and put more of the advantage to the person who is actually funding the company. These additions, when we structure an investment, do not put any financial stress on companies in the critical “early rounds”.

Let me briefly touch on some of the basics though:

• Capital Table or “cap table” for short.

This is the amount of equity already allocated and who “owns what”. It, in other words, is how big is the pie and how it is split up. A good Founder will plan for the many rounds of later financing that any successful firm will ultimately need. Even the oldest and most established firms tap outside markets from time to time, whether it be debt (Bonds) or equity. Its totally appropriate to have shares authorized but not issued, for exactly this purpose.

• Revenue/Pre-revenue/EBITDA (earnings before taxes, interest, and depreciation)

Is the firm generating revenues and if so; what are the earnings. If post-revenue…meaning the firm is generating income but still less than the expenses…what is the burn-rate, and how long until this goes from “red-ink” to “black ink”? This will have a large weighting on what is a company worth today as it will show what risk of additional cash will be needed and will present shareholders be diluted (the pie gets cut up more). Finally, what are the projected numbers one year, two years, and 3 years out.

• Exit Plan
  • IPO…and projected time frame
  • Merger/Acquisition?
  • Payout from profits?
  • Dividends

• Total Potential Market/Projected

I hate this one, as young inexperienced entrepreneurs love to “hang their hat” on this. It’s usually the sole reason they start their company. This means nothing (or very little) without the right product or service, Management that can execute the vision, and proper funding.

• Management

The old saying “a Ship is only as good as its Captain”. The closer the CEO and his team is to the industry the better. The more successes they have had in that industry…even better. The Trifecta would have a number of individuals, in management, who have verifiable successes in various industries showing they are flexible and can execute with a track record.

Now here are some things that an Investor can try and structure into their investment, and is the “hallmark” of what we try and do with every one of our projects before we bring them to our “Angels”:

• Non-Dilution clauses

This is a biggie and can make the whole investment far more valuable. This clause means no matter how much additional capital comes into the firm (dilution) that the non-diluted shares do not lose their piece of the pie. This can be done by the original investor being given additional shares when new capital comes in above the agreed allocation. It can make the whole investment far more profitable.

• First registration rights

On exit, if the firm eventually goes Public, this can be invaluable, as it means there is no tie-up period. The investor can sell if he chooses when he wants without restriction.

• First Repayment with retention of equity

This is literally the best of all worlds as the investor gets paid back first and gets to retain his holdings.

We try and incorporate this into all our negotiated projects, helping to put more of the arrows in the Investors hands.

We are an Angel group and not a FINRA investment regulated firm. These are our opinions only and not to be considered professional investment advice. Please consult with your own independent advisor before making any investment decisions. Investing in early stage and unproven firms carries high risk and potential loss of capital.