If the company did not have their own valuation before asking for money, i think the money negotiation process will be really bad for the company, right? Also if they have >5 investors, how are they going to affect the negotiation? I mean each investor will come up with a different premoney #, so how to negotiate with different investors?
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don't even know where to start here
please start anywhere. Just want to hear people's thoughts. Anything. Thanks.
Kind of a ridiculous question, but you could set a standard rate that would allow 3 to sign to entice the other two to sign. You could also try to sign them one at a time at their offers to collect as much capital as possible from top down, but there needs to be way more information.
My question is all investors come up with a different premoney valuation. But at the end of the day, is it necessary to have a same premoney # among company and all of the investors, because the equity should be the same price to all the investors? If investors buy the equity at different price (due to different premoney value), I assume there will be some drama later on, right?
You would negotiate with them all and have a standard clearing price - while there are exceptions (which can cause drama) in a round most if not all of the follow on investors will enter at the same price. They can submit different bids like you're thinking, but company will sometimes come back to them and tell them what the clearing price is, giving them the choice to accept or drop out.
I have a few minutes before a call so I will get you started. Google pre-revenue valuation or how to value a start-up. http://www.angelcapitalassociation.org/data/Documents/Resources/AngelCa…
Most seed or Series A investors will want 20-30% of the business as first money in and most pre-money valuations for very early stage start-ups range in the low to mid single digits ($mm). As the founder you could seek to set the terms by providing each investor with a term sheet, allow them to mark it up, and then negotiate based on their offers or you could request terms sheets from each party and let one person take the lead and draw a line in the sand.
The alternative would be to use convertible debt with warrants and worry about valuation in the subsequent round. You would allow early investors to convert at a discount to the next round's valuation.
The problem with early stage valuation in general is that it is essentially bullshit. You do not have a long enough historical track record or vintage period to produce defensible projections and there will be few true available comps. That is not to say that you cannot use TAM or some other type of analysis to define the market opportunity and what share you expect to take but again it is much more art than science.
I have spent most of my career in traditional LBO PE but dabbled in VC along the way. If you are just getting started Brad Feld's book is a great first resource or check out askthevc.com
Good luck to you.
Thank you so much Junkbondswap. several followup questions. I read Brad Feld's book. It also suggested the lead investor. If use lead investor, should I just let the lead contacts and talks to the others? Also is it better to use fewer investors as possible? It seems like a lot of investors will create a lot of work.
You mentioned "negotiate based on their offers". Let me interpret to see if I really understand here. So right now we sent them out the total # we are raising (without premoney value). If they have deals on the table, we will let each investor come up with their own offer. The offer will include their own premoney value and their investment # (assume that we do not use convertible debt with warrants). Then we let one person take the lead, and negotiate the premoney value. Am I right?
Unfortunately, as with most things, there are no clear cut or simple answers to your questions.
1) The lead investor would essentially put a stake in the ground (set valuation, terms, controls, etc.). You would then go out to other prospective investors and say, Fund "x", our lead, is comfortable with the following terms and conditions and to the extent that you wish to participate you must agree to the same terms. You could potentially, although I would not suggest it, have your lead coordinate and circle up commitments with other investors but it really depends on the dynamics. For example, if Kleiner and Accel have a track record of co-investing in certain types of deals they may be willing to work collaboratively. Again, it really depends on the situation and sophistication of the people involved.
2) The ideal number of investors is a function of striking a delicate balance (maximizing valuation, % ownership, and control). You may want to have a single strategic partner who could be very valuable to the development of your business or you may want multiple investors/perspectives who have less individual control. As an entrepreneur you generally are at the mercy of the market. If you are in high demand you get to pick and choose your friends.
3) Every business, contract, negotiation, etc. has levers and pressure points. Set a deadline for submissions and choose the best offer. If you are seeking a lead and need to fill out the balance of the raise revert back to 1) above.
That is obviously very high level but the best I can come up with based on what you have said so far.
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