Valuation
Two good posts on valuing an early stage deal. First from Fred Wilson which is philospohical here. The second from Brad Feld on deal algebra here Feld Thoughts: Venture Capital Deal Algebra.
What the second post does not go on to say is that by the time you factor in a. liquidation preferences (VC's get there money out first and sometimes in a multiple of what they invested) b. potentially a coupon on the preferred stock c. penny warrants etc. that the implied pre / post-money valuation is a lot different from the headline number. To borrow some algebra from Brad Feld:
Implied post-money = (invested amount)/(return to investors / total return). For the implied pre-money subtract the amount initially invested.
Thus if you invested $2mn at $3mn pre-money (assuming no further dilution) you would expect the investor to receive 40% of the proceeds of a sale. Actually the % of the return that an investor gets after liquidation preference et al can be a lot higher.
As Brad Feld points out many serial entrepreneurs don't always follow the math - try this on a whole nation of first time entrepreneurs. Add to it the national characteristic that lawyers don't matter its the handshake agreement and you are open for all sorts of interesting discussions.
08 July 2004
Valuation
Two good posts on valuing an early stage deal. First from Fred Wilson which is philospohical here. The second from Brad Feld on deal algebra here Feld Thoughts: Venture Capital Deal Algebra.
What the second post does not go on to say is that by the time you factor in a. liquidation preferences (VC's get there money out first and sometimes in a multiple of what they invested) b. potentially a coupon on the preferred stock c. penny warrants etc. that the implied pre / post-money valuation is a lot different from the headline number. To borrow some algebra from Brad Feld:
Implied post-money = (invested amount)/(return to investors / total return). For the implied pre-money subtract the amount initially invested.
Thus if you invested $2mn at $3mn pre-money (assuming no further dilution) you would expect the investor to receive 40% of the proceeds of a sale. Actually the % of the return that an investor gets after liquidation preference et al can be a lot higher.
As Brad Feld points out many serial entrepreneurs don't always follow the math - try this on a whole nation of first time entrepreneurs. Add to it the national characteristic that lawyers don't matter its the handshake agreement and you are open for all sorts of interesting discussions.
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