Why bother valuing a start-up?
Posted 14 Jun 16 by Steve Perri
Simple - because all stakeholders, existing or potential, are interested in what something is worth.
An understanding of value will allow any Entrepreneur to be prepared to confidently negotiate with existing investors and potential investors to raise capital to fund the future growth of the business.
Existing Investors will be able to monitor the value of their investment and establish an entry price for an additional ownership interest or an exit price to liquidate their investment.
Potential Investors can’t negotiate an entry price and ownership interest for their investment with start-up businesses without understanding the valuation of their potential investment.
As part of a retention strategy, a start-up may wish to issue equity to Employees and Contractors and the establishment of an issue price would be required.
Before seeking to value any start-up business, the following must be considered:
- Who requires the valuation and what is its purpose?
- Is the start-up at a pre-revenue stage or a pre-profit stage?
- Is there a growth target with defendable parameters and what is the level of funding required to achieve these targets?
- What is the reputation and track record of the founders?
- What is the size and potential of the market to attract and engage new users and will this restrict growth?
- Is there a clear business plan and strategy?
Without value, the framework for price cannot be understood.