How to Negotiate Valuation With a Startup
The key to negotiating the valuation for a startup is to find and examine each value that is already in the business, as well as each value that must be built to achieve a successful exit.
Start with the team and check to see how many of the necessary skills are already onboarded, versus the skills that need to be recruited.
Second, look at the product to see what has been built and what must be done to bring the product to the market.
Third, look at the leads and revenue and how much has been done to build a pipeline of customers and turn on a repeatable, predictable revenue stream.
Fourth, look at the status of the intellectual property. Ask what has been filed and when?
It takes three years for patents to be awarded, so in most cases, the startup will have filed provisional patents or has filed a utility patent and must now wait for official actions.
Investors look for working systems in the business for lead generation, closing customers, fulfilling the service, or providing the product.
Estimate the work done so far and what is left to be done to meet the proposed forecast.
Add to the valuation any other factors that enhance the business and subtract factors that must be overcome to arrive at a valuation.
The key is to set today’s valuation based on what is in the business today — not tomorrow.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.