valuationIf I want to raise funds by diluting equity of my startup, how can I calculate the valuation of a startup (that might not look as sexy as the product startups)?
If the company is less than 3 years old, will it work accordingly as well?
Keep in mind that individual investors typically have their own method of placing a value on your business. To give you some insight on the complexity, to have a formal business valuation or 409A performed, it typically costs upwards of $10K or more.
In order to have a meaningful discussion and/or negotiation, you will need a compelling argument. If your company has revenue/sales but is unprofitable, you can use a multiple of that number as a basis (this is a weak position). The more common valuation is a multiple of EBITDA. The multiple is generally 3-5 times EBITDA, or you can use SDA - “seller discretionary earnings” which is EBITDA plus some “add-backs” such as owner salary and other non-essential operating costs (car lease, moving expenses, theft, etc). So if your EBITDA or SDA for 2016 was $50,000 then your company valuation could be as high as $250,000 (5 multiple x $50K). So if your investor is willing to give you $25,000 then a fair offer would be 10% of equity / 10% of shares.
It’s not clear if your startup is actually up and running or generating revenues, so here is a great article on pre-market valuations: https://medium.com/@StephNass/valuation-for-startups-9-methods-explained-53771c86590e#.yo4w0i6c3 Good Luck!
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