In startup funding, the valuation is often fixed and does not change.

Performance-based valuation changes the valuation if certain conditions are not met.

Here’s how performance-based valuations work:

Let’s take an example.

The startup proposes a valuation of $10M and forecasts revenue to reach $1M by the end of the year. 

The investor agrees to a $10M valuation.

If the startup does not achieve the revenue forecast, then the investor claws back some of the equity. 

In the example, if the revenue falls short, then the valuation goes from $10M to $8M.

The startup must achieve certain performance requirements to maintain the valuation.

This provides an incentive to the founder to achieve the milestone promised to the investor.

This compensates the investor in the event the milestone is not achieved.

Consider a performance-based valuation for your fundraise.

 

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.
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Thank you for joining your host Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.
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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.