Angel round valuation refers to the value of a company that is seeking angel investments. Angel investors will closely examine a company's value before providing any of their money, so understanding your business's valuation is important if you're in need of funding.

What is Angel Investment?

If you're seeking an angel investment for your company, there are two primary sources you can choose. First, you can look at small investment firms formed for the specific purpose of making angel investments. Second, you could pursue an investment from a wealthy individual who has a history of making these investments.

In general, angel investors want to invest their money in companies that have passed the formation stage and have a product that's nearly ready to bring to the market. The amount of money that an angel investor will provide to a company can range between six and seven figures depending on the value of the company.

In most cases, the owners of a company and angel investors do not have a personal relationship. The investor's primary motivation is getting a big return on investment. Angel investors often have years of business experience and may be willing to mentor the owners of the company seeking an investment.

The angel investment round will typically take place between the friends and family round and the series seed round. Angel investments are very beneficial because they can help a company raise its value before later-stage funding rounds.

Before seeking angel investments, you should consider how much money you need to grow your company, which means you need to research several issues:

  • How much you will need to build your product.
  • Finding the right market for your product.
  • Creating a strategy for getting your product noticed.

You should understand that angel investments are meant to grow your business and help you build your product, and should not be used to pay big salaries to the company owners. After you know how much you need from your investors, you can determine your company's valuation. Be sure that when negotiating with angel investors, you never give them more than 15 percent of your company.

Valuing a Startup

Valuing your startup is one of the most important parts of seeking angel investments. Because startup companies generally do not have any revenue, correctly valuating these companies can be very difficult, and the process is much different than valuating an established business that is earning revenue.

Predicting a startup's potential success can be tough, even when using qualitative analysis. Because of this, angel investors may make their decision based on the value they see in the company's owners. Valuations made before a startup has any revenue can be tricky, and there's no one way to do it right. Learning about a few different methods of valuation can help you to calculate the value of your startup so you'll be well-prepared for the angel investment round.

Most angel investors prefer to use the scorecard valuation method when deciding if they should invest in a company. With this method, your startup will undergo comparison to other similar startups that have already received funding, taking into account issues such as the region where your company operates and your product's market. Using the scorecard method, the first thing that investors will do is to look for the average value of startups similar to your own.

After determining an average valuation, your startup will be compared to other companies using factors such as:

  • The experience of your management team.
  • If there is an opportunity for your startup to achieve success.
  • Specifics about your product.
  • The competition that you will face.
  • Sales channels and marketing strategy.
  • Additional investments that your startup may need.

While the scorecard method might not provide a concrete valuation of your company, it can be a useful tool for angel investors trying to decide if they will invest in a pre-revenue startup. Even if you don't use this method to value your company, you should understand how it works so you'll be able to effectively negotiate with your prospective investors. If you don't understand this method, your valuation may end up being too low, which can reduce potential investments.

If you need help with angel round valuation, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.