How Much Equity Do You Give a VC?

You’re a startup: pre-revenue & pre-money. You want to raise $1MM today. How much equity will you need to give in return? Since you’re pre-revenue, you’ll need to establish valuation by other means.

Scorecard Method

Bill Payne’s scorecard method is one way to set valuations for very early stage companies.

At Peri Ventures, we use the spreadsheet on the right to establish this. We ask the founding team to submit their individual scorecards. We make up our own and the final valuation often a weighted average of the submissions. Yes, it’s subjective, but it’s an excellent and easy starting point for discussing valuations and (re)setting expectations.

NPV

Another way to determine today’s valuation is to consider the net present value (NVP for you finance geeks) of future valuations, based on say, projected revenues. Obviously, without any track record, projections will be hard to believe and you should expect that investors will heavily discount your projections (and therefore, valuations).

So, How Much Do you Give a VC?

Say you want to raise $500K today. Your projections, after a “reasonable” discount, put the valuation five years out as $23MM. A VC will typically look for a 9/10x return at that time frame which puts today’s NPV as $2.5M. This is the post-money valuation today. So for $500K today, you will have to part with 20% equity in your company.

Angels invest at earlier stages than VCs, but consequently look for a higher IRR.

If you want VC money, you need to think like a VC. Contact Peri Ventures to learn how we can help you pitch to VCs and angels.