tech-company, investment, saas, cloudI have spend a lot of my free time for the last 10 years working and refining my software product (target audience are web developer). It is quite unique and is distributed as a free software to a great success. More than 30,000 developers have tried it worldwide, one of our partners (based in India) has presented our product to 1000s of students and delivered few 100s of sessions. Product has been used in over 500 european companies - large and small (and for the most of those they have discovered it on their own) and I’ve sold around 50 professional licenses before I decided that charging for software is not a sustainable model and decided to re-focus on Software as a Service model instead. The hard preparation are complete and before taking a dive in, I’d like to secure our first funding round.
Going forward, I have prepared a comprehensive business strategy based around “Platform as a Service” concept. I’m willing to take our existing user-base and offer them our new Cloud platform services. I have a technical partner willing to give us free initial hardware and several technology partners who want to work alongside with us. We also plan to re-start our training strategy in India on a 10-times larger scale and reach out much wider audience while also promoting our new PaaS. I’am also ready to ink the deal with a partner willing to fund those efforts.
The reality of our situation: we’re still tied up with a lot of consultancy work and much of our energy is spent on other clients to make our living. We have discussed and made a commitment to work full-time on a product once we can afford to pay ourselves some salaries. I also need help in some areas where we’re not strong such as marketing.
I have many friends, contacts and even clients who are very interested in investing in what I’m doing. I would like to give them a chance to invest into my business, so that we have some breathing room for the next year and have some free money to spend.
Dear StackExchange, I’d like to have some suggestions as to how much equity I should give away and how should I valuate my business. I thought about giving 10% away at 5m EUR valuation, is that a realistic figure? Our downside is that we have no cashflow right now, other than that, we’re doing great.
Any additional advice would be great.
The amount of equity you give away depends on the valuation of the company and the amount of money you are trying to raise.
There are several tools online that helps startups assess the value of their company. Usually this is a combination of tangible book assets, intangible assets like patents, unique technology, industry outlook, company growth roate and revenue forecast. There are consultancies who would do this for a small fee. It is a good idea to prepare a valuation of your company before you go into for investments as the percent the VC or other investor would get out of your company depends on the valuation.
The online calculator gives you an idea about what affects the valuation. http://www.caycon.com/valuation.php
Assuming you have done business and financial planning including a 5 year forecast (essential if you are looking for funding) you would arrive at an amount that includes the startup preparation costs and the running cost of the business until you break even. This figure would be how much you need to raise. Some percent of this maybe contributed by the founders from their equity and perhaps from debt. The reminder would be how much an external investor has to contribute.
Example
If your company is valued at $10 million and you need to raise $2 million to fund your venture or your next phase of the business, the investor would take 20% of your company (2 is 20% of 10) in shares.
Things to look out for
From what you’ve stated, it sounds like you are going for a “Friends & Family” round first. These are people who are more likely to invest in YOU than your idea. They don’t have much money but will contribute to your cause.
If you go the venture capitalist / Angel investor route, you should figure out your pro-forma (finance statement showing the money you need over the next 6 to 12 months) so you know how much you need for investment.
Different investors will give you different valuations. Shop around! Don’t settle for the first thing that comes your way. Figure out what you want first then go and pitch to various private investors and firms. Something I find helpful is to decide on your absolute maximum percentage you are willing to give up for the funding you are looking for. Keep in mind there could be other factors involved as well such as strategic partnerships with your investor. For example, they have close connections with CompanyX who could be a potential acquirer.
Valuations can sometimes be very arbitrary but are loosely based on these factors:
Things they typically look at:
All content is licensed under CC BY-SA 3.0.