investment, finance, contracts, value, ideaWe have recently developed a new conceptual product, which is about a unique electro-optical instrument, and we will probably finish the initial prototype in a month.
Fortunately, we have found a potential investor willing to invest in our project. And now we are in the contract phase.
In the “wealth and capital” section of the contract, there are going to be two major items:
Now the questions is:
How can we price a new idea? Which parameters do we have to consider in estimating this idea’s financial value? And more importantly, how can we quantize/digitize these parameters, and present them in forms of dollars?
In my experience, most people will agree that the kind of “valuations” that float around at this early stage mean very little. On the other hand, there are conventions that give you an idea of a typical seed-stage relation between cash and equity. So you should certainly have the clearest idea you can of what the market you are addressing is worth, but I wouldn’t go overboard on trying to get that very precise because what you probably want is a do-able deal that gets you to prototype or ready-to-market stage.
It’s also true that in a future round, the rule that “the last money you need sets all the rules” is a reminder that if the valuation is way off, this can be corrected easily enough if you demonstrate investability.
Some people avoid this process by taking initial funding as a loan convertible to equity. That way, your investor can (a) be assured of a return on the risk capital in all success cases, via a future funding round, and (b) has some definite yield if the capital is tied up for years.
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