Negotiating Your Company's Valuation
What is my company worth? What should I tell the investors my valuation is for the next round of financing? I get these questions from entrepreneurs all of the time. The easy answer is that your valuation is what the market says it is and don’t tell investors anything!
So how do you determine the valuation of a startup or early stage company? First, educate yourself on the financings of similar companies in your industry. There are a number of sources that report financings, including Pitchbook and VentureSource. If you do not have access to these databases, ask your law firm or accounting firm if they can help you, as any firm that is active in this area will have access to these or similar databases and can help you gather the relevant valuation data.
Next, look at current market conditions. Is the space for your technology/products hot? You can probably expect to attract term sheets from investors closer to the higher range of valuations. What is happening in the public markets? Are stocks in general highly valued or is there a correction or bear market going on? Market conditions play a significant role in determining value.
Once you have pegged a value, what should you do with it? Keep it to yourself! Getting this information is your own market intelligence and will help you assess the attractiveness of any term sheets you get. Whatever you do, DO NOT put it in your executive summary and DO NOT ever tell an investor!
Investors, particularly venture capitalists, ask early on in discussions with entrepreneurs “What is your company’s valuation?” Why do they ask this question? Is it because they want your opinion of valuation and it will impact their decision on how to value your company? NO! They ask the question for one simple reason – they want to know if they can stop their review of the investment immediately, save their time and say no to the investment!
Remember, the key to every communication with investors is to peak their interest enough to get them to move on to the next step, whether it is to have an initial call, a first meeting or issue a term sheet. Why would you do anything that prevents them from moving along that continuum? At each step, your leverage goes up and their investment of time and attention increases so they are less likely to want to walk away.
Clients sometimes say “Fine, but what if I don’t tell them my valuation, we have meetings and I get a term sheet and the valuation is way too low for me even to consider it? Didn’t I just waste a lot of time?” My answer is no, you did not. You now have a term sheet. You can always say no to it (see how the leverage has shifted!) and you can let other investors know you have a term sheet! (Of course making sure you are in compliance with the terms of any nondisclosure agreement you may have).
Once you have a term sheet, your potential investor has invested a lot of time and resources in reviewing your company and, in the case of a venture firm, has presented to his or her partners and got them excited about the opportunity as well. They don’t want all of the time they invested to be for naught, and they certainly don’t want to have to explain to their partners why they lost that hot deal! What a great time for you to negotiate the valuation! And if you can get more than one term sheet, now you are really in the driver’s seat on valuation!
So, how do you respond when an investor asks “What is your valuation?” You should say “You are the best investor I could possibly have for my company. I know we will work great together and build a huge company. I am sure we will reach agreement on valuation – now let’s get started on drafting a term sheet!”
