Mathew, there is hardly a straightforward answer to your question and while I agree with RobertJ that your immediate capital requirements of $5,000-$10,000 are probably not sufficient to consider an equity deal, I wouldn’t recommend to use a valuation that is based on a services for equity type of arrangement either.
A good way to put a very tentative value on a seed or development stage company is by using a Discounted Cash Flow Valuation. Since you managed to secure the support of an attorney and a web designer based on an equity stake in your company, I am assuming that you have completed a business plan or project summary that includes more or less detailed financial projections. If these projections include a Cash Flow Statement, you can use the Free Cash Flow that you believe your company will generate every year and use it as a basis to put a very tentative value on your company. In order to generate a more or less credible valuation, you will need to adopt so-called discount factors, which basically represent the risk/uncertainty of you or you company achieving these free cash flow balances every year. It’s therefore no surprise that these discount factors can be drastic (up to 200% or more) in year 1 and 2 and gradually decrease with the company becoming more mature. With other words, if you project that your company will have generated a free cash balance of $250,000 in year 1, it’s not uncommon to assume that the company will actually have a negative cash balance of $250,000 (based on a discount factor of 200%). Just google Discounted Cash Flow Valuation or DCF Valuation and I’m sure you will be able to download the required spreadsheet.
As far as extending deals to friends and family is concerned, try putting something together that you can live with and that they may find appealing as well. Since they are your friends’ parents, I am sure their decision to back you will not entirely rest with the fundamentals of your proposal. RobertJ is right again, try to secure a loan, rather than equity and if need be, sweeten it with an option to covert into equity after 2 years.
I hope this helps.
Mark
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Jackson Steiner
http://www.JacksonSteiner.com
Advanced Document Design for entrepreneurs, intermediaries, and the financial services industry.
http://www.Publications.FastVentures.com
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