What Is the Value of My Company?
The value of a company is important because it is the basis for determining the “cost” of the new capital when seeking equity additions to the capital structure. Simply explained, a company with a $1 million valuation and no debt seeking a new capital of $1 million would be worth $2 million after the investment. The old owners would own 50% of the new $2 million company (for their contribution of the old company with a $1 million value), while the new investors would also own 50% interest for their contribution of $1 million cash.Generally, a valuation considers four questions:
- How much is the company worth today?
- How much could it be worth in the future?
- How long will it take to create the future value?
- What is the likelihood of achieving success?
There are a number of different methods used to value startup companies. Bill Payne, a prominent angel investor with the Angel Capital Association describes four popular methods to value pre-revenue companies, asserting that entrepreneurial projections are “too imprecise” and optimistic to be reliable. Professor Ian Giddy of New York University focuses on more traditional methods of corporate valuation, while a popular YouTube video provides business valuation 101 explanation. Prospective business owners seeking capital must understand the basic concepts of discounted cash flow and the use of market multiples before establishing or negotiating a value for their company.Understanding how your company will be evaluated and being able to affect the valuation positively can enable you to get higher valuations and retain greater ownership of your company when the investment is funded.
