Raising Seed/Angel Round: Valuations and Term Sheets for Startups

Continuing on our series of blog posts around raising seed/angel round for startups, we will focus onValuations and the clauses in a term sheet. As a founder, being solely focused on negotiating the valuation without understanding the terms being signed is a typical approach most founders take. A good deal is signed ensuring you understand the clauses in the term sheet, and what is being agreed on as this could impact your ownership and exit in the startup going forward..

 “What is Valuation? Is there a formula investors use to value your startup? How do I get the best valuation?” - typical questions which every founder asks when they decide to raise angel money.

To bust some myths here: There is no magic formula to valuations.  Your business is worth what someone is willing to pay for. Valuation is more an art than a science. However it is good to understand how investors view startups and consequently how they value the business. As there is no formula, it completely depends on how you are able to demonstrate leadership in the different categories.  There are 4 broad categories to consider here:

 1.Sector or Industry you are in: External Market Dynamics?

Each Industry / Sector has unique Valuation Dynamics based on size of market, market opportunity, scale possibility and amount of investments available for later rounds of funding. As a founder, do the following home work:

• Study valuations of similar startups in your space who have raised their angel round. 
• Study exits that happened in this space (acquihires, M&A)
• Study EBITDA  (earnings before interest, tax, depreciation, and amortization)
• Understand growth metrics in your industry (it is important to baseline your growth metrics against competitive landscape)

 Read the complete article on LetsVenture blog.

*You can also download a Termsheet template for your reference. Subscribe on blog.letsventure.com.