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Startup "Valuation"

How do you establish a valuation for a new or startup company? The more common approaches follow.

  1. The owner(s) sets the value based upon his prior experience with similar companies.
  2. The initial capital is usually raised from the three F's – family, friends, and fools. The owner(s) decide how much (or little) of the company to grant these early investors in the form of a percentage of equity. For example, if this capital represents equity or a position which converts to equity at 10% of the total equity, then the overall enterprise value is 10 times the amount of the capital.
  3. A secondary capital infusion from an outside source, often in the form of preferred shares. These infusions are classified Series A, Series B, Series C, etc. The amount of money provided to the company by each investor round is negotiated as to the initial outlay; future commitments based on performance criteria; and the equity (or conversion to common) percentage. This agreed upon equity percentage sets the overall valuation.
  4. Based upon early Company results and financial projections, we develop a discounted cash flow model to estimate Company enterprise and per share values. This actual valuation is then compared to market transactions (outright sales of similar companies), to determine reasonable ranges of multiples for both projected revenues and EBITDA.
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