What is the Proposed Valuation?

Valuation is a critical term in any funding.  And, this past  Tuesday I sat down to help one of my start-up clients dissect the terms of a proposed investment.  The founder, like many entrepreneurs, was confused by the proposed valuation.  We walked through the numbers, and he suggested I blog about this to help other entrepreneurs avoid the same confusion.  Here goes:

Your term sheet offers to invest minimum of $1.0m, and up to $1.75m with agreed upon investors.  The proposed valuation is a “$4.25m pre including a 10% pool.”  What the heck does that mean?  What is the value of the company to date, and your founder’s stake?  $4.25m, right?  NOPE!

Assuming your start-up raises all $1.75m, the nominal values of the various stake holders is:

Stakeholder(s): Nominal Value Percent
Founder $3.65 million 60.83%
Investors $1.75 million 29.17%
Unallocated Pool $0.6 million 10.0%

Surprised?   Don’t be.  The offer requires a yet to be tapped “pool” of 10.0% as of the closing to be used for equitizing current and future employees, advisors and consultants.  And, the dilution from these issuances will be at the expense of, and be solely dilutive to, the pre-investment shareholders.   Having an agreed upon “unallocated pool” is a VERY STANDARD investment condition.  But, the key take away is that request is part of the overall valuation discussion.

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