Valuation: Where Art & Science Collide

Definitions:

• Stock Classes– Common– Preferred

• Warrants & option pools• Seed Rounds• Convertible notes: discounts & kickers• Pre/Post

Fatal flaws pre-financing:

• Company structure• No option pool• No assignments in place• No Due Diligence prep• No market research on comps

Fatal flaws pre-financing: Company Structure

Options are not candy!

Changing your company structure takes time & money. What you do on the front end impacts

your ability to close quickly & efficiently!

Fatal flaws pre-financing: Options - 1

Options are not candy!

Fill your pool on the front end! No investor wants to suffer dilution before you begin.

Fatal flaws pre-financing: Options - 2

Options are not candy!

Fatal flaws pre-financing: Assignments

Options are not candy!

Fatal flaws pre-financing: Due Diligence

Options are not candy!

There’s no time like the present!

Planning ahead now enables faster review and stronger negotiations.

Fatal flaws pre-financing: Mythical Claims

Options are not candy!

There’s no time like the present!

Planning ahead no enables faster review and stronger negotiations.

Unicorns may exist…

…but if you’re raising

capital, you’re

not there today.

Valuation Methodology that works

• It’s not about $ it’s about %• It’s about mitigating risk– Referencability– Time to next round– Scale– TCR = total capital required– Team– Business model validation

#1 Rule most Investors Claim

• Companies don’t fail on technology, the fail on execution!

• What can you do to improve your risk factor here?

Where things get hairy…

• Getting a lead to price the round• Shopping term sheets• Focusing in on exit comps only• Focusing in on ‘Uber’ round valuations• Shortening your runway to <12 months• Claiming CFB before you’re in market• Claiming 1% market share before you’ve

validated your model

Math that works:

• Reverse engineering 3 year financials when you’re in or near market entry

• Bottoms up approach focused on known/justified accounts

• Value of pipeline• Value of team• Value of COMPORABLE competition (but be

careful – better to use adjacent field than your next door neighbor!)

If Guidelines help:

• 20-25% ownership Seed Round-Series A• 15% Ownership Series B• 15% Series C• 10% Series D• 5%+ Series E and above

Are you Serious?!

Yes, 100-70% = 30?!

But remember…• Option Pool refreshes• Founders stock• Double triggers

Today is great, but tomorrow is unknown…

• Up rounds, down rounds, flat rounds – they happen! Don’t focus too much on today’s $ as…

The only certainty:

$0 x 100% is ALWAYS $0