Forums: Discussions for entrepreneurs and small business.

I have a new, very innovative startup company that's in it's initial develpmental stages. I've told very few people about it (haven't even told family) and from those few I already have some solid/serious investment offers on the table. Seeing as we're a new company that will  be going after a confirmed untapped target market in a $21B industry the growth potential is tremendous!

As I begin to enter into conversations with these investors, how do I valuate my new startup with no current revenues? I need some sort of number to calculate what their investment would mean in ownwership percentage of my company and be able to gauge if I'm OK with that number. I've done quite a bit of research and have come across a lot of information but the best info was geared more for companies already doing business. If someone could assist and/or point me in the direction where I could receive some assistance it would be appreciated.

There are several ways to set a valuation including the value of the assets or the values of the future results (cash flow). Ultimately, however, the valuation will be set my mutual agreement between you and the investor. If you have received some serious offers that should give you some indications.

Generally, the professional investor has a ROI in mind and will use that as a guide. Their perceived risk will also effect the expectation which impacts the terms of the deal. Great risk means they will expect greater return which means they may want/need a larger equity position.

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Look up capital budgeting.  With a capital budget, you can project future expected cash flows (make sure they are reasonable).  You can do this for say 10 years then terminate the end value.

Take those cash flow projections and discount them back into a today value given a reasonable discount rate (say 30%).

The end result can provide a Net Present Value (NPV) that you can use as a negotiating starting point.

Also, know that once a value is agreed on, take that value and divide it into the amount of investment to determine the percentage of the company the investor should get.

Example, you say your business is worth $500K and the person is making a $100K investment - then they get ($100K / $500K) or 20% of the business.

Lastly, for valuation, you could also go out and get contracts for business - then use those contracts to value the business - if you can do so with your concept.

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