What is the valuation of my company?
7 comments
The value of any company (new or established) is the expectation of its future profits.
It's harder to estimate the future profits of a company that isn't profitable yet, but that doesn't mean the company is worth nothing. In fact, there is a whole industry based on buying the stock of newly founded, unprofitable companies. It's called venture capital. Its leading practitioners are all extremely rich, which they would not be if their work consisted of buying stuff that was worth zero.
It's harder to estimate the future profits of a company that isn't profitable yet, but that doesn't mean the company is worth nothing. In fact, there is a whole industry based on buying the stock of newly founded, unprofitable companies. It's called venture capital. Its leading practitioners are all extremely rich, which they would not be if their work consisted of buying stuff that was worth zero.
Paul, that's speculative investment valuation or the valuation for the purposes of speculation a.k.a. the VC method: http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=288006
In a court, judge appointed assessor would not use VC method but would instead instead use NPV method to value a company. As you know very well, there's a lot of risk and uncertainty associated with startups and it would not be prudent, for a judge, to value something based on the VC method since court decisions work the opposite: on minimization of uncertainty. Clearly, the poster is looking for a valuation that would arise if his case ended up in the court.
In a court, judge appointed assessor would not use VC method but would instead instead use NPV method to value a company. As you know very well, there's a lot of risk and uncertainty associated with startups and it would not be prudent, for a judge, to value something based on the VC method since court decisions work the opposite: on minimization of uncertainty. Clearly, the poster is looking for a valuation that would arise if his case ended up in the court.
Uh, no. Discounted cash flow analysis is pretty much standard throughout the investment world. It's used to value just about everything, from startups to blue-chips to bonds to real estate.
You and PG are basically saying the same thing: NPV is the expected value of all future profits, discounted back to the present by the risk-free rate of return (normally taken to be the interest rate on T-bills). You're assuming that profits will remain constant, though. In most cases, this is not a valid assumption. Even big companies like Coca Cola have some earnings growth factored into their stock prices.
There is, of course, risk in trying to predict future profits. But there's also risk in assuming profits will remain constant (as I rudely found out when I invested in a stock with a P/E of 9, only to see it lose money the next quarter). That's why financial analysts get paid big bucks.
The only company that's worth zero is a bankrupt one. Sometimes not even then - many bankrupt companies still have a residual market cap because investors expect them to emerge from bankrupty and continue operating.
You and PG are basically saying the same thing: NPV is the expected value of all future profits, discounted back to the present by the risk-free rate of return (normally taken to be the interest rate on T-bills). You're assuming that profits will remain constant, though. In most cases, this is not a valid assumption. Even big companies like Coca Cola have some earnings growth factored into their stock prices.
There is, of course, risk in trying to predict future profits. But there's also risk in assuming profits will remain constant (as I rudely found out when I invested in a stock with a P/E of 9, only to see it lose money the next quarter). That's why financial analysts get paid big bucks.
The only company that's worth zero is a bankrupt one. Sometimes not even then - many bankrupt companies still have a residual market cap because investors expect them to emerge from bankrupty and continue operating.
Say I've put in $50,000 to the company as the founder and I own half of it (I hold 50% of the issued shares). The two other founders have 25% ownership each, all sweat equity since I'm the only one putting up cash.
What happens if one of them decides to leave? What is our stock valued at and how much would it cost to buy it back from them?
What happens if one of them decides to leave? What is our stock valued at and how much would it cost to buy it back from them?
It depends how much of your stock was in return for the money you put up, and how much in return for your work as a founder. If your work as a founder was worth zero, the valuation of the co (at the moment you invested) would be $100k, since you bought half of it for 50.
In most startups you don't have to buy people out if they leave (in the first year) because most startups have vesting with a one-year cliff. I.e. none of the founders get any of their earned stock till they've worked for a year.
In most startups you don't have to buy people out if they leave (in the first year) because most startups have vesting with a one-year cliff. I.e. none of the founders get any of their earned stock till they've worked for a year.
We had a little chart that weighted the monetary contribution to 25% with sweat being worth 75%.
(Did a quick calculation, not sure if it's right... does this mean we're worth $400k??)
The reason why I'm asking is because I'm trying to convince the others that vesting is INDEED necessary since I'm worried that someone could just pull out and we'd lose all our startup funds in order to buy the stock back.
Our lawyers are apparently too busy to answer these questions because I've asked them and they haven't been any help at all. PG and others, if you can point me in the right direction that'd be great.
(Did a quick calculation, not sure if it's right... does this mean we're worth $400k??)
The reason why I'm asking is because I'm trying to convince the others that vesting is INDEED necessary since I'm worried that someone could just pull out and we'd lose all our startup funds in order to buy the stock back.
Our lawyers are apparently too busy to answer these questions because I've asked them and they haven't been any help at all. PG and others, if you can point me in the right direction that'd be great.
Quite simply, company is worth present value of future cash flows. Is the company profitable? If not, it's worth zero. It doesn't matter how much money you've put in and how much sweat was put in and how much opportunity cost was sacrificed... that's all sunk cost. If you're not profitable and have no revenues, you're worth zero and that's where you should start your negotiation from.