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If a startup has an unreasonably high valuation in its F&F round, would Angels and VCs be concerned?

Answers

Topic Expert
J.D. Floyd
Title: Owner, CFO
Company: CFO Outsourcing Solutions, Inc.
(Owner, CFO, CFO Outsourcing Solutions, Inc.) |

They might notice it, but it would not influence them.

Reason being that VC's will always open a discussion by asking; "What are you looking to raise dollar wise and what percentage do you want to sell?" That is the equivalent of a pickup line in a bar such as "...come here often?". But in the end, they will determine their own value for the company and then buy the original percentage offered or more - once again at the value they the VC determine the business is worth.

So in the end, it does not matter how much the Friends & Family round was - that was simply for survival. The VC funding is for growth. Apples verses Oranges.

J.D. Floyd

Topic Expert
Kent Thomas
Title: Founder
Company: Advanced CFO Solutions
(Founder, Advanced CFO Solutions) |

J.D. is correct in stating that sophisticated investors (Angels & VC's) will always determine what value they are willing to pay and will not pay more. In my experience, however, a friends & family round that is priced too high, will have a negative impact on an Angel or VC round. The investors do not want to be the "bad guys" when you inform your seed investors that they are going to be severely diluted. In my opinion, you are always better off to price your seed financing round(s) fairly relative to the likely valuation of an institutional round so that you don't provide another reason for the VC's to select a different opportunity that does not have a messy cap table. In addition, consider the ethical responsibility that you, as a founder, have to early investors who may not be experienced or sophisticated in investing. You are taking their money, common courtesy and ethics demand full disclosure and fair dealing. If you take money from friends and family, you should make it right with them by offering anti-dilution protection if a later round proves that the valuation was too high.

Topic Expert
Simon Westbrook
Title: CFO
Company: Aargo Inc.
( CFO, Aargo Inc.) |

I see two potential concerns arising from an overvalued seed round. Even though a VC investor will set the new value based on their own criteria rather than the last round, they will likely form judgements about your business sense which could damage their confidence in investing. Secondly, you will have seed round investors who will see a down round. This tends to make them unhappy and provokes incentive for them to complain, challenge the actions of the company, and generally take more time to handle, and again the VCs want friendly shareholders, not unhappy ones who might, at some point seek some kind of legal action.

So, make sure your first round is fairly priced but positions the investor for upside in the next round.

CV Sudarshan
Title: Sr. Executive
Company: Gorilla Expense
(Sr. Executive, Gorilla Expense) |

I don't think VCs will worry a whole lot because they have their own math towards determining valuation. Many times they will come in with a take it or leave it option with some negotiation depending on your relationship with the VC.

Ideally, you want to be close to what the VCs will come up with. That means don't overvalue the business. Otherwise you will end up diluting your F&F (assuming you already know you will raise more than F&F money) and they won't be happy. Remember, F&F were the ones who stuck with you during the crucial initial phase.

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