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Chapter 20. How Much You’re Worth

Most startups begin thinking about financing by pondering the question, “How much are we worth?” While this seems like a reasonable question to ask yourself before you begin negotiating this exact fact, it’s oddly irrelevant to the discussion.

That’s because there is almost no metric that can assess the value of the typical “two founders and a dog (and we don’t have the dog yet)” startup. How much is your idea worth? Your background? Your untested prototype? The three friends you cajoled into buying “enterprise licenses”? The thousand users of your beta? MBA-type readers can discount-cashflow themselves to pieces, but a startup’s value is simply not determined by evaluating its assets.

So if someone’s going to invest in you, how much of the company do they get? To figure this out, you need to know your premoney valuation—how much your company is worth. Yes, the thing I just told you that you can’t calculate.

Here’s how it really happens. First, startups are valued by the market. This is often the dominant factor. What are similar companies getting as premoney valuations? Active investors know exactly where the market is at; it’s their job. Savvy angels and startup founders know where to go for this information as well: the lawyers. The big firms do hundreds of venture deals each year and keep accurate aggregate data on each of them. Great attorneys can tell you exactly what the premoney valuation range is for your ...