In negotiating the valuation, it’s important to understand the impact of that valuation on follow-on rounds and the exit.

A waterfall analysis maps out the cap table with subsequent rounds of funding.

To run a waterfall analysis, create a spreadsheet with the cap table owners and the current fundraise round.

Include the owners, the pre, and post-money valuations.

Then apply the standard valuation of follow-on rounds of funding that will be required. 

In this exercise, it’s important to gain agreement with the startup on the exit and what is required. 

Many early-stage startups have unrealistic expectations about the exit value.

Take into consideration the impact of convertible notes, participating and non-participating preferred shares, liquidation preferences, options pools, and various exit scenarios.

Vary the valuation on the current round to see the impact on the final exit value. 

Finally, discuss the results with the startup as part of your negotiations.

 

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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Disclaimer:
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.