Startup Valuation: How to Calculate It - Startups 101

15 Nov 2023 (1 year ago)

Early Stage Valuation - Intro (0s)

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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

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

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

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

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