Do you have a company / business at the startup stage, with a very mind-blowing business idea? Maybe it’s a tech-related company and you already have a viable product in the form of either a software, an application or maybe a functioning website.
Perhaps you have progressed further to having a good, well balanced team made up of qualified and experienced people, and you guys are already working together to build the company.
Or maybe, you have even gone further than that, and you have launched your product to the public and are already getting some amount of engagements, either in the form of likes, comments, followership on social media, installing of your mobile app and usage, or purchasing of your products / services.
And now, you are ready to scale the company, and need to raise capital either from Angel investors, VC firms, or friends and family, and you are wondering, how do I value my startup, how do I account for the effort that has been put in so far and the progress we have made? How many percent equity do I give for this capital I am about to get without shortchanging myself?
Well, there are various ways of valuing a startup, and one of them (which will be discussed here) is the VALUATION BY STAGE method.
Basically, this method uses the current stage of development of the company to determine the level of risk still present in investing in the company, and hence the current value of the company. This method is often used by Angel investors and VC firms to determine the value of early stage companies they want to invest in.
The companies are valued based on the following stages:
– A company with an exciting business idea or business plan is valued at between $250,000 to $500,000.
– If the company has a strong management team in place to execute on the plan, it is further valued at between $500,000 to $1million.
– If the company has a final product or technology or prototype, it is valued at between $1million to $2million.
– If the company has gone further to having strategic alliance and partners, or signs of a customer base, it is valued at between $2million to $5million.
– And if the business has clear signs of revenue growth and obvious pathway to profitability, its value is $5million upward.
So, if you are in the process of raising funding for your startup, and are wondering the amount of your company’s equity to give out in exchange for this capital, bear in mind the current valuation of your company based on your current stage of development, and negotiate from a place of knowledge and strength.