A Bubble for Seed Stage Valuation

When entrepreneurs raise equity capital for startup companies, the investors’ percentage of ownership is determined by the negotiated valuation for the company at the time of investment. For example, if the negotiated pre-money valuation is $1.5 million and the investors provide $500,000 in equity investment, the investors are purchasing 25% of the company [$0.5 million ÷ ($1.5 million + $0.5 million)]. And, as you might expect, when the company grows and meets important milestones (granted patent, first revenues, etc.), the valuation of the company increases. If investors fund the company at a later stage, after the company has met important milestones, the investors’ $0.5 million in capital will purchase less of the company. Not surprisingly, entrepreneurs are generally encouraged to postpone fundraising until critical milestones have been met, so entrepreneurs can sell less of their company to raise a given amount of capital.

By Bill Payne http://www.billpayne.com

Full Story: http://gust.com/angel-investing/startup-blogs/2012/01/10/a-bubble-for-seed-stage-valuation/