One question that we’ve gotten several times is “what are standard VC deal terms?” For those of you who have followed Brad’s blog, you know that he and I wrote an extensive series on term sheet / venture terms. Over time, we’ll update these entries and bring them over to this site, but for now, you can find them here.
To answer your questions regarding what is a “fair valuation” for your deal, that is not an exact science. We’ve receive hypothetical questions like:
“How can I estimate the valuation of a 1 year old startup software company with about $500k revenue?” and
“If we are a healthcare play, is 20% equity for $1M and one board seat in a Series A considered the norm and fair?”
Unlike businesses that have operated for a while, it’s hard to use concrete metrics to derive business valuations. Normal techniques of discounted cash flow, comparable public comparison companies, etc. all are somewhat suspect with a new business enterprise.
There is not a single standard technique that VCs use to value companies. It’s part science, part experience and part “gut.” If the deal is competitive, then that figures into the price as well.
Consider that VCs do not invest in companies because of cash flow and revenue, rather the return potential on a company sale or IPO. If your company has 500k in revenue, that is a good sign that you have some customer traction (and that will help your valuation), but the exact number is somewhat irrelevant. It’s about the potential exit value.
As for whether or not $1M should buy 20% of a company in a Series A deal, that would imply a $4M pre-money. Without full knowledge of your company, it’s impossible for me to say what is a reasonable number, but we’ve done deals in this valuation range, so at first blush it’s not completely out of bounds.