You have done the hard part; you have come up with a novel idea. The question now becomes how do you turn this dream into a reality? One of the most important first steps is to know how to determine your pre-money valuation.
What is a Pre-Money Valuation?
A pre-money valuation is the amount of value a company uses for its projections when pitching to investors. These investors will use this information when determining how much money they want to invest in your startup. Typically, the pre-money valuation of the company will be as agreed upon by the Company’s founders and the lead investor of the financing round, prior to the investment.
Why is it Important?
One of the best attributes a founder can possess is to be a powerhouse when it comes to finding and raising the necessary capital to keep their heads above water. A pre-money valuation can help you understand the value of your company when pitching to investors.
What are the First Five Steps in Determining your Pre-Money Valuation?
- Have a total understanding of your product or service. You should know the details of your product or idea better than anyone, and by doing so, will be able to advocate for investments.
- Learn how and where to find investors
- Keep your valuation realistic – an unrealistic, aggressive valuation can make it more difficult to fundraise in subsequent fundraising rounds.
- Research those who came before you and those who are in the same or similar space as your company. Find out how much they were able to raise during their pre-money valuation.
- Set yourself apart: If you are going to use your competition as a reference point, you must know more than just what their pre-money valuation was. It’s important to understand who they are and what they are about. Then establish why your product stands out.
Do not Confuse Pre-Money Valuation with Post-Money Valuation
When asking for money make sure you are doing so based on your pre-money valuation, or in others words the value of the company before the money comes in, as opposed to your post-money valuation, i.e., what the bottom line looks like after it has come in. The numbers for the former will be better for you as a founder. It is absolutely critical to understand the difference between pre-money and post-money and to confer with an experienced business attorney for related counsel. Overlooking the difference between pre-money versus post-money valuations can dramatically impact your cap table and the respective ownership percentages of you, your co-founders and key employees, and your investors.
What Method Should I Use to Value my Business?
At times, it can seem like there are a thousand different ways to value a business. Sometimes it may be hard for you to see the forest through the trees. Do not despair. Invest some time in your company by contacting an experienced San Jose transactional attorney.
Contact a Skilled San Jose Corporate Attorney Today
To get diligent, expert corporate legal advice, contact us and set up an appointment with the Startup Company Counsel’s Corporate law firm located in San Jose, California. Email Startup Company Counsel or call us (408) 441-7555 today.
