How to Negotiate with Investors: Pre-money Valuation
Attention from investors is the first thing. We discussed that in our previous post. If you have a good startup idea and follow some guidelines, there is a high chance to get noticed. Let’s imagine you succeeded and got investors’ first interest. After some introductory meetings, there comes a point at which the discussion gets more serious, and investors start considering to put money in your company. This generally means that you have done your homework. Investors believe in your company, your team and your vision, and they are willing to jump on board.
Let’s assume you are pitching to investors. You are in front of them right now! You nailed your pitch, transferred your enthusiasm and thrilled their minds. You get to the very last slide, when you put together the investment proposal. Well, you are probably well prepared on the amount you need to raise. If not, you’d better not even show up to the meeting.
But here comes the main point: How to evaluate your business? How much equity are the investors going to buy?
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Main rule: Have a reasonable range of pre-money valuation!
You can’t just shoot the first estimate which pops up in your mind: that may be a deal-breaker. You can’t remit the decision to your investors either: how would that look in their eyes? Confidence is the right attitude. No matter how well you know your company, when it comes to valuation you may find yourself on a slippery surface.
To be confident, you shall put together your knowledge of the company, its stage of your business, strengths and weaknesses, potential revenues, and systemically sum up their individual contribution to the overall enterprise value. An exact estimate gives a very good impression of your skills as manager, but it should be matched with a range of variation. Investors want to see you know what you are doing and that you show enough flexibility for negotiations. It’s like when you are about to buy a house: well before hearing the price you create a prince range in your mind and, if the dealer’s ask is within it, then you’ll probably take that option in serious consideration.
Congratulations, now your investment is one step closer! Learning however is not done yet. Here you can learn more about how investors value your startup at early and later stages.
Side note: If you are skeptical about your bargain power and you fear “your company is worth what the market will pay for it”,create a market for your startup, and you will have the leverage to get what you feel it is worth.
Knowing the value of your company is essential when negotiating with investors! Get your valuation at Equidam for FREE!