How to Negotiate Valuation for Startups Without Revenue

TLDR; Valuing a startup without revenue involves negotiation, focusing on the future, and considering funding rounds. Communicating vision and negotiating fair valuation are key.

💰 Inventory

Valuations for a startup in the early stages are nebulous. Founders often take inventory of the assets the company owns, including the time spent on the startup, to defend or determine a valuation.

However, this approach can cause investors to focus on the wrong things and open up a point of potential contention and debate on the value of the assets.

Using time spent on the company as a defense for valuation can lead to a focus on things that shouldn't be the main focus.

It's important to avoid opening up a can of worms by using time as a valuation method, as it may distract from the true value of the company.

🤝 Negotiation

Valuation for an early-stage company is more of a negotiation than trying to actually assign a value to the company.

It's about determining how much of the company an investor will own if they choose to invest.

The negotiation is about striking a fair deal for both the founders and the investors, ensuring enough upside for the investors and enough ownership for the founders to achieve wealth.

📈 Early Companies

Early-stage companies, especially those with just an idea and no revenue, face the challenge of defending a valuation.

Without any tangible assets, it becomes essential to focus on the future potential of the company.

This involves communicating the vision, growth, and potential of the company to attract investors.

The focus should shift from the current value of the company to its future potential.

💡 Funding Rounds

Considering subsequent funding rounds is crucial, as most venture-backed companies raise money multiple times.

It's important for founders to hold enough equity to protect themselves not only in the current round but also in future rounds.

This requires using the vision of the company to communicate its value and negotiate a fair deal for both the founders and investors.

⚖️ Quick Tips

Avoid focusing on the valuation of the company in early conversations. Instead, focus on communicating the value and vision of the company to get investors bought into the future potential.

Negotiate the valuation only after investors are aligned with the company's vision and value.