Startup Valuation Calculator: Everything You Need to Know
A startup valuation calculator allows new business owners to determine the business value, often used for investment purposes when selling company shares.8 min read
2. Steps to Valuing Your Startup
3. Why Is a Startup Valuation Calculator Important?
4. Reasons to Consider Not Using a Startup Valuation Calculator
5. Reasons to Consider Using a Startup Valuation Calculator
6. What Could Happen When You Use a Startup Valuation Calculator?
7. What Could Happen When You Don't Use a Startup Valuation Calculator?
8. Common Mistakes
9. Frequently Asked Question
What Is a Startup Valuation Calculator?
A startup valuation calculator allows a new business owner to determine the value of the business, often used for investment purposes when selling shares of the company. Valuing a business is a complex and often subjective process, but valuing a brand new company is more difficult because there is little to no data on which to base the value. Most startup owners rely on a basic principle of finance: risk vs. reward, or transaction vs. market size.
Startup company owners should understand that even with proper startup valuation calculations, the figure exists to show what percentage of the company an investor gets for making an investment.
Regardless of what phase the company is in, it will likely become important to determine the value. Your startup might be pre-revenue, post-revenue, trying to raise funds to launch a new product or service, or looking to grant existing employees with stock options and other benefits. In order to make the investment opportunity or benefits to employees worthwhile, you'll need to rely on a startup valuation calculator that produces the proper value of the company.
During meetings with investors, your offer will likely go through some negotiation. But it's important to have the information and numbers available to back up your valuation. Most startup company owners should be prepared to give up 25 to 35 percent of the company for each equity-based financing deal.
Steps to Valuing Your Startup
Step 1: Create a list of assets
When you start a new company, the assets that you've purchased, accumulated, and designed are a major part of the value. Get started by making a list of assets owned by the startup to put a starting value on the company. It's not always easy to put a dollar value on your assets, but having a list makes it easier to compare valuations to other startups with similar assets.
Assets could include:
- Cash flowing into the company
- Products developed by the company
- Proprietary software developed by the company
- Relationships with users or customers
Your list should also include revenue, which is more than just the amount of money your company has earned since it launched. Revenue in the early days of a startup tends to go back into the company to sustain its growth. But you can look at the key progress indicators (KPIs) to help continue with the valuation calculation. The most common KPIs used by startup companies include:
- Referral rates
- User growth rate (often by month or week)
- Statistics of daily usage
- Customer success rate
Make sure to include your staff members on the list as well, since they could add value to the success of your company. Look at experience, education, and expertise when valuing each person on your staff.
Step 2: Determine the stage of your startup
If you haven't earned measurable revenue yet, go into meetings with investors as a pre-revenue company. Post-revenue companies typically have more statistics and numbers to share, making it easier to place a value on the organization. After you determine what stage your company is in, you'll need to decide on a model to value it.
Dave Berkus, a life-long entrepreneur and investor, developed his own method for early-stage valuation. It includes a list of concepts and stages in which a company might be, along with the dollar amount to add to the value for each. If any of the following five exist within your company, add $1/2 million to the value for each.
- Sound idea (product risk, basic idea)
- Quality management team
- Prototype (reducing technology risk)
- Strategic relationships (reducing competitive and market risk)
Another option for determining pre-revenue valuation is called the Risk Factor Summation Method. It includes more options to add to the value, but each category has an overall lower value than the same categories in the Berkus method. These categories include:
- Stage of the business
- Competition risk
- Funding/capital risk
- Litigation risk
- Legislation/political risk
- Reputation risk
- Manufacturing risk
- Marketing/sales risk
- Potential for a lucrative exit
- International risk
- Technology risk
When calculating each, add a grade of ++, +, 0, -, or --. Then use the following scoring scale in the 12 categories:
- ++: Add $500,000
- +: Add $250,000
- 0: Add nothing
- -: Subtract $250,000
- --: Subtract $500,000
Startup companies that are post-revenue will use a different startup valuation calculator, since these companies have more information and data to back up the numbers. Investors tend to look for opportunities that offer 10-20 times their original investments. The revenue, business model, customer acquisition cost, and other factors should clearly show that your startup offers a good investment opportunity.
Other factors to include in your valuation are the reputation and traction of the startup. The faster your company gains traction, the more interested an investor will typically be in the opportunity. The reputation is also a factor, especially if you have experience with starting companies.
If your startup is in a hot industry, investors may be more interested in the company as well. Another factor is your distribution channel. The option pool, or stock set aside for current and future employees, can also influence your company's valuation. An option pool is typically about 10-20 percent of the company's value. Having too high of a percentage of the company set aside for future employees could actually be negative to investors, since you're putting too much away for employees that you may not have yet.
Supply and demand, the industry in which you operate, and stage of development will all factor into the overall value of your startup.
In order to value your post-revenue startup, follow these steps:
- Calculate the revenue run rate, which is the previous month's sales multiplied by 12
- Assess the historical growth rate curve to determine the weekly or monthly revenue growth rate
- Adjust the revenue run rate by multiplying the growth rate by the sales of the most recent month, then determine the rate over the course of a year
- Take the adjusted revenue run rate and multiply it by 10 to produce a reasonable value of the company
The cost of customer acquisition should factor into the assessment of the historical growth curve, particularly if your company is investing heavily in marketing and other opportunities to generate new business.
Step 3: Make adjustments
Before meeting with an investor, you need to understand the differences between pre-money and post-money valuations. The pre-money valuation of the company is the value before any investments, which is the main focus of the first two steps in valuing a company.
A post-money valuation includes the amount of the investment. When you have this number, it will set the bar for the overall value of your company for future investment opportunities as well as prices for selling stock options. If the company grows and expands, you can use the post-money valuation to start a new pre-money valuation for future investments.
Why Is a Startup Valuation Calculator Important?
Most investors are looking at the exit strategy when making a decision about whether or not to invest. A startup valuation calculator can help the startup owner and investor(s) look at the estimated value of the company to decide on the appropriate amount of money to exchange for a percentage of the business. The investor will also consider how much it will take to grow the company to reach a higher valuation when selling it to someone else.
Going into investor meetings with a reasonable value for your startup will make the process go more smoothly and increase the likelihood of getting an investment that works for you and the investor.
Reasons to Consider Not Using a Startup Valuation Calculator
If you don't use a startup valuation calculator, you could walk into a meeting with an investor looking very unprepared. Investors always do their homework before meeting with company owners. They will have looked into valuations of similar startups across the globe. Without a reasonable valuation on your company, and the data to back it up, an investor may not be willing to take a chance on your startup.
Reasons to Consider Using a Startup Valuation Calculator
Using a startup valuation calculator to determine the overall value of your company can help you secure investments or offer stock options to employees. Examples of companies using startup valuation calculators are everywhere. When watching the popular TV show, "Shark Tank," viewers can see and hear hundreds of examples of startup valuation calculators that helped them arrive at their company values. These investors may not agree, but most of the smart business owners and entrepreneurs enter the "shark tank" with information about how they decided on a value.
Facebook is another example. The social media site began selling ad space to generate revenue in 2004, shortly after launch. Throughout that year, Facebook generated total revenue of $382,000. The company then raised $500,000 from an investment firm for about a 10 percent stake in the company, at a valuation of $4.5 million. The valuation was based on approximately 12 times the first year of revenue.
Before seeking investments, you should also figure out how much money your company needs and what you're willing to give away in order to get that amount. A startup owner should make sure the company has enough money to run three experiments and have enough for six months of business operation. An investor is more likely to give you the full amount you're asking for if you can produce proof that the amount is necessary to grow the business. Using a startup valuation calculator can help determine the value and ensure that investors get enough of the company to make it worthwhile.
What Could Happen When You Use a Startup Valuation Calculator?
When you use the appropriate startup valuation calculator to assess the value of your startup, you can talk to investors with confidence and walk away from deals that don't fit the goals of your company.
What Could Happen When You Don't Use a Startup Valuation Calculator?
Meeting with an investor without an accurate startup valuation for your company is never smart. If you've ever watched "Shark Tank," you may recall business owners that went in without much data to back up their valuations. They tend to get heavily criticized by investors, who understand the calculation process and what goes into each method.
However, many startup owners believe that they have to achieve the highest possible valuations for their companies. But there are alternatives to this concept. You can raise money as you go, seeking investments as urgent needs come up. Businesses may achieve success through this model by spending very little and growing slowly but steadily.
One of the most common mistakes made by startup owners is over-valuing the company based on one of the valuation methods. If you're not in the post-revenue stage, don't use the method to value your company that includes revenue. An investor might not take you very seriously if you go in without a realistic understanding of what your company is worth.
Frequently Asked Question
- Does the valuation of my startup really matter to investors?
Yes. Investors will look at the valuation that you bring into a discussion to determine whether you're prepared to and serious about selling a portion of your company. Using an accurate method for calculating your startup's valuation will make you look better in the eyes of investors, while potentially increasing their interest in your company.
If you need help with a startup valuation calculator, you can post your legal need 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.