Levers of Valuation

Posted on 28. Oct, 2008 by in Levers of Valuation

A common mistake is to only focus on the pre-money valuation when negotiating with investors/entrepreneurs.  Initially we will look at 6 "Levers of Valuation" that affect a typical investment in an early stage company.  This is not the complete list, but a good introduction to the concept.

  1. Pre-money valuation
  2. Investment amount
  3. Option Pool creation
  4. Liquidation Preference
  5. Dividends
  6. Convertible vs. Participating Preferred Stock

Negotiating all of these terms in parallel is the suggested method, as all of them together influence the complete valuation.  Let’s take an example…

Example

  • $4M investment
  • Case 1: $6M pre-money valuation with a 15% option pool created from the pre-money side
  • Case 2: $4.5M pre-money valuation with a 15% option pool created from the post-money side
  • Both result in the same shares and % ownerships for the investor and entrepreneur.

By understanding each of the these individual levers it is possible to understand the implications of all of the levers acting together.  In the future, we will provide a more complete perspective into all of the levers

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  • Alan Cornford

    Interesting…really nice to see the main drivers in this stuff in one place.