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When raising seed fund by angels how do evaluate the cap of the comapany


I am running after seed funds, meeting with angels and they all love the company and the solution, it supposed to be a $1m -$1.5 round invested by some number of individuals.

it seems like each one hesitate to be on of the first to invest, how do I resolve this matter?

In addition - I have been asked about that valuation and percentage, which I will not be able know to until get the entire picture of how many investors? Which investors? And the total amount that I could raised, how do i deal with it? what is a good answer?



Topic Expert
Peter Freeman
Title: Chairperson - Clean Tech Committee
Company: Keiretsu Forum - Angel Investors
(Chairperson - Clean Tech Committee, Keiretsu Forum - Angel Investors) |

This is a very tough questions. The short answer is "it depends", on a great many things. Also, it is always negotiable, and I try not to offer a number first. However, in most situations this is not possible.

There are some benchmarks. For example, there are valuation services that can provide some guidance, basically using market comparables. There is enough data on deal flow to make this work, in my view. Consider stage of development, industry sector, and quality of deal. It costs something, but is often needed for 409A purposes as well.

One other approach I find useful is the so-called venture capital method. You can find this in textbooks, one I use (I teach at GGU) is Valuation by S. Titman. In simple terms you project a future enterprise value, using the standard financial projection framework, discount that back to the present at the (very high) VC discount rates, and use that as the pre-money value.

I hope this helps, it is an important and difficult subject.

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

Let's address each question individually:
1) Don't be too surprised that no one wants to be first - they are worried that no one else will join in and theirs will be the only money in. You can resolve this by agreeing to keep the first money in escrow until a minimum amount is raised. Also, in order to get "someone in first" you'll want to focus on the individuals or groups who know your industry / business best and get them to be your 'champions'. Once you have a reputable angel or group in, getting others to follow is easier.
2) Since you are the "seller", you really can't expect the buyer to make the first offer on valuation. As hard as it is for an entrepreneur to do, you'll have to come to grips with setting a valuation. At your stage there isn't a good formula for determining value so you need to find out the terms on which other companies in your area have raised seed financing - this becomes your guide. In general I can tell you that you can expect to give up between 20% and 40% ownership for the seed round and that the ultimate valuation will be determined through negotiations. Where you end up on that range, will depend on a number of factors including, size of market, competition, your past experience & depth of understanding of your customers and the market that you're addressing, your ability to sell your vision and more. Sometimes early stage companies use a convertible debenture for the seed round and offer a specified discount on the next financing as the conversion pricing. This can be a good instrument if you and the investor can't agree on a valuation but it also has potential dangers so get good legal advice before you sign a term sheet.

Good Luck!

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

The first investors are vital to your business. Without them there are no follow on investors. Regardless of your business proposition, experience and track record the investor is at a disadvantage becauase he is the outsider, and he is the one who stands to lose real money (as opposed to sweat equity) if the business fails. A low valuation is the Investor' way of offsetting that risk.

Alternatively a secured convertible note can acheive the same or better position for the investor. Convertible at a discount of say 10 to 25% to the next professional investment round, earning interest at say 6 to 10% pa, and secured on the Companys assets. This gives security and return while avoiding the challenge of reaching an agreed valuation.


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