Question: My partner and I are trying to agree on an initial valuation to establish an equity share percentage for a seed stage company that is not yet operating. I realize there are many factors you take into account, but I am wondering about my partner’s suggestion that we use a multiple of year 4 EBITDA from the B round expansion of the business.

Answer (By Bob Aholt):  The topic of valuation is probably the most talked about, and certainly the most negotiated subject in our Angel deals.

Your partner’s valuation premise is certainly unique.  While it may be plausible, let me come at the valuation question from a typical Angel perspective - - we generally invest in deals that have a realistic chance of a 10x return in 5 years (or a 5x return in 3 years).  If you can work the numbers from a seed round into those returns, you’ll generate some interest.  Here’s how I typically see the numbers playing out:

- $500k raise on a $1.5m pre-money valuation.  Post money valuation = $2m.  Angel ownership = 25% ($500k/2m)
- “B” round at $5m on a $15m pre.  Series A diluted to 18.75% (75% of the initial 25%)
- Series A target 5 year sales price $26.667m

Therefore your goal is to convince the Series A investors that you have a company that can grow in 5 years to a firm that’s capable of being purchased for over $25m.

Tags: Bob Aholt, Startup, Valuation

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