How to value your startup and decide how much equity to give away

Valuing and deciding how much equity to sell of a company that you’ve put your heart and soul into is not easy. While there is no single answer, at SeedLegals we’ve analysed data over hundreds of rounds to help you make an informed decision, and perhaps, more importantly, to be able to justify that valuation to your investors.

Generally, when building your pitch deck, you’ll need to make three key decisions:

1. How much money should I raise?
2. What percentage of the company should I sell?
3. What company valuation should I use?

All three questions are mathematically intertwined, so there are two approaches you can take:

1. Decide how much money you want to raise, and go forward from there; or
2. Start with how much of your company you want to sell, and work backwards.

Option 1: Decide how much money you want to raise

Some advisors say to raise as much as you can. VCs and investors will usually say you should plan to raise enough to last 12-18 months before you need to raise money again.

Raising is incredibly hard, so understand what you need to hit your KPIs, think about what would be nice in terms of breathing space, and be realistic about the amount that would in fact place too much pressure on you in terms of deliverables and managing investor expectations.

The reason for a 12-18 month runway is that realistically you’ll need to be on the fundraising trail six months before you’ll have new money in the bank, and you’ll need to show growth between now and then to get new investors interested. Any shorter than 12 months’ runway and it’s going to be hard to hit key milestones or show any real traction which means you are going to be unable to justify your next round valuation. It’s called a runway for a reason – if you don’t have lift off before you reach the end, things will come to a sudden stop!

So, if your starting point is figuring out the cash you need, then simply look at your monthly burn rate, add in the team members...

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This post is taken from a guest article on the Robot Mascot blog, written by Anthony Rose, Founder & CEO of Seed Legals – insight-driven automated legals for startups.