Your valuation must fit within our risk/reward parameters if an investment is to be made. The most common reason for breakdown in the negotiating process is over divergent valuations between the entrepreneur and the potential investors. Typically, we look for pre-money valuations below $5 million, but will consider higher valuations where warranted.
In determining valuation we take into account the effect of all commitments to issue shares, i.e., the “fully-diluted” number of shares. We expect a reasonable number of shares to be already reserved (and counted as part of full-dilution) for filling out the key management slots and for other employee stock options.
The pre-money valuation is the value you put on your company before obtaining the capital you seek. This is calculated by multiplying the fully diluted shares immediately prior to the proposed financing (i.e. 1,000,000) by the price/share of the proposed financing (i.e., $1/share) to arrive at the pre-money valuation (i.e., $1,000,000). If you add the proposed financing amount (i.e., $500,000) to the pre-money valuation you get the post-money valuation ($1,500,000).
Pre-money Valuation Based on Percent of Company
Some entrepreneurs are more used to thinking in terms of offering some percent (i.e., 20%) of their company for some amount (i.e., $200,000) of financing. Numerically, divide the proposed financing ($200,000) by the offered percentage (20%) to get the post-money valuation ($1,000,000), and subtract the angel money ($200,000) from the post-money ($1,000,000) to get the pre-money valuation ($800,000). These simply represent two different ways to calculate the valuation.
Investment Value vs. Company Valuation
It is important to keep in mind that there may be a need for follow-on investment, so the initial investors will typically have anti-dilution protection afforded by pro-rata participation rights in future financings.
Angel group members generally receive 15-35% of the company’s fully-diluted equity in exchange for their investment.