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. Pre-money valuation Investment amount Option Pool creation Liquidation [...]

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Liquidation Stack

Posted on 12. Sep, 2008 by in Graphical Examples

Investors refer to “down-side protection” a lot in funding startups. One way investors protect themselves is with Preferred Stock, which is dependent on the Liquidation Stack. The liquidation stack refers to the order in which shareholders are paid proceeds from a sale. Let’s look at the example shown on the right. First, let’s take the [...]

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Option Pool Creation

Posted on 17. Aug, 2008 by in Basics, Graphical Examples

One of the more subtle points of valuation is option pool creation. The first method is an option pool created from the pre-money side, but calculated on a post-money basis. The second is an option pool created from the post-money side, and calculated on a post-money basis. This is where a graphical example helps dramatically. [...]

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Convertible vs. Participating Preferred Stock

Posted on 04. Aug, 2008 by in Graphical Examples

Convertible Preferred Stock will either convert into common or stay as preferred (and take out its liquidation preference and dividend) in a exit event. For Participating Preferred Stock, the liquidation preference and dividends are taken out, and then converts into common. In common, the Participating Preferred Stock takes their ownership amount along with the other [...]

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Dividends

Posted on 04. Aug, 2008 by in Graphical Examples

Dividends are an extension of the Liquidation Preference. Dividends for early stage companies are not typically paid out until an exit event. When they are paid, such as when the company is acquired, they combine with the liquidation preference and are paid before any common shareholders receive proceeds. Let’s take an example. The increased number [...]

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Liquidation Preference

Posted on 31. Jul, 2008 by in Graphical Examples

Liquidation Preference is a multiple on the amount invested for a given round.  An example of an exit event (e.g. the company is sold) provides for the easiest explanation.  Let’s assume a company raised $2M on a $4M pre-money valuation.  After the financing the investors own 33% of the company’s outstanding shares.  However, if the [...]

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Term Sheet: Employee Pool

Posted on 07. Jul, 2008 by in Levers of Valuation

Originally posted on Feld Thoughts “Term Sheet: Voting Rights and Employee Pool” by Brad Feld, reposted with permission. “Employee Pool: Prior to the Closing, the Company will reserve shares of its Common Stock so that __% of its fully diluted capital stock following the issuance of its Series A Preferred is available for future issuances to [...]

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Term Sheet: Vesting

Posted on 07. Jul, 2008 by in Levers of Valuation

Originally posted on Feld Thoughts “Term Sheet: Vesting” by Brad Feld, reposted with permission. When Jason and I last wrote on the mythical term sheet, we were working our way through the terms that “can matter.” The last one on our list is vesting, and we approach it with one eyebrow raised understanding the impact of [...]

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Term Sheet: Conditions Precedent to Financing

Posted on 07. Jul, 2008 by in Levers of Valuation

Originally posted on Feld Thoughts “Term Sheet: Conditions Precedent to Financing” by Brad Feld, reposted with permission. As I watched 24 last night, I kept thinking to myself “Why the fuck does Jack have his cell phone ringer on – hasn’t he ever heard of vibrate?” immediately after his cell phone rang but right before he got [...]

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Term Sheet: Dividends

Posted on 07. Jul, 2008 by in Levers of Valuation

Originally posted on Feld Thoughts “Term Sheet: Dividends” by Brad Feld, reposted with permission. As our term sheet series unfolds (almost as exciting as 24, eh? – if you’ve been reading the last few days I bet you figured out that I recently had a 7 hour plane ride with a laptop battery that was in pretty [...]

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