Venture Capital For Dummies

Chapter 11

Telling Your Valuation Story

In This Chapter

Identifying the various ways to determine valuation

The art and science of negotiating valuation in early-stage companies

The dangers of establishing an inflated valuation

When you approach investors and ask them to invest in your company, you are actually asking them to buy shares in your company. Anytime you offer something for someone else to purchase, you have to give them a price. To determine the price of a share, you have to determine how much the whole company is worth and how many shares you want to break the company into.

Although valuation gets a lot of attention, it’s not the most important thing in a negotiation. By the time you get to negotiation, the investors’ stock preferences and other term sheet terms make the exact valuation of your company less important. (See Chapter 9 to get the details on structuring the deal and Chapter 13 about negotiating investment terms.) The one time when your company’s valuation is really important? When you are trying to attract investors. If you blurt out the wrong valuation for your company, you can send investors running in the other direction.

Understanding the valuation ...