Evaluation of an “early stage” start-up: less difficult than it seems – Companies

The subject of evaluating a start-up often comes up in conversations. Despite the interest it arouses, this subject continues to create confusion because, in the press, behind the title “this company raised X million euros” there are usually a good number of questions. What is the company’s assessment? If specified, is the evaluation before or after fundraising – pre-money or post-money in English?

When researching the issue, we often come across articles that detail valuation theory. First, remember that by definition the value of a firm is the discounted value of its cash flows (cash flow) future.

There are several methods to estimate this value: discounted cash flow (DCF) or the comparison method, which consists of comparing the target company with other companies with a similar profile and which have been the subject of recent transactions. Multiples can also be produced based on this known data, for example, a company’s value in its billing, which is then applied to the target company to estimate its value.

Indeed, alongside these traditional approaches, an investor will also wonder whether the valuation thus calculated allows founders to retain sufficient control and motivation for subsequent rounds of funding. In particular, it is common for a venture capitalist to ensure that the founding team still owns more than 50% of the company’s shares after Series A, or even Series B.

For example, if for a Series A the amount to be invested to take the scale-up to the next stage of its development is 3 million euros, it is likely that the potential investor thinks that the founders should keep, say, 70% of actions after the operation. This is because the investor knows that if the founders end up with just 20%, they may lose all motivation to grow cash due to its potential return on exit (high potentialin jargon) is limited.

Thus, if before the transaction the founders owned 100% of the shares and when raising 3 million euros, they should still keep 70% and the new investor 30%, this gives an after-money value of 10 million euros. euros (= 3 million euros/30%). The value of the pre-cash founders’ shares will be 7 million euros (=10 million euros after – 3 million euros of investments).

In many cases, the assessment early stage therefore, it combines traditional valuation tools (DCF, peers, transactions) with a qualitative verification of the control that is maintained by the founders. Sometimes it is this maximum dilution aspect of founders that prevails and the valuation then becomes “simple as that”.

In the end, it’s all the ancillary matters that take time to be negotiated: how the money will actually be injected into the company (cash, loan, subordinated loan, etc.), the preferences granted to investors, the conditions under which employees can receiving shares or stock options, what value the shares of a departing founder will be valued at… So many subjects that could be the subject of articles in their own right!

Matthieu Remy, CEO and co-founder of easyvest

When researching the issue, we often come across articles that detail valuation theory. Let us first recall that by definition the value of a company is the discounted value of its future cash flows, and there are several methods to estimate this value: the discounted cash flows (DCF) or the comparable method which consists of comparing the target company to other companies with a similar profile and which have been subject to recent transactions. Multiples can also be produced based on this known data, for example, a company’s value in its billing, which is then applied to the target company to estimate its value. Along with these traditional approaches, an investor will also wonder whether the valuation thus calculated allows founders to maintain sufficient control and motivation for subsequent funding rounds. In particular, it is common for a venture capitalist to guarantee that the founding team still owns more than 50% of the company’s shares after Series A, or even Series B. For example, if it is Series A, the amount to be invested for taking the scale-up into the next phase of its development is €3 million, the potential investor is likely to think that the founders should retain, say, 70% of the shares after the transaction. That’s because the investor knows that if the founders end up with just 20%, they risk losing all motivation to grow the company because their potential return on exit (upside potential, in parlance) is limited. the founders own 100% of the shares and raising 3 million they should still have 70% and the new investor 30%, this gives an after-money value of €10 million (= €3 million/30%). The value of the pre-cash founders’ shares will be 7 million euros (=10 million euros after – 3 million euros of investments). In many cases, early-stage valuation combines traditional valuation tools (DCF, peers, transactions) with a qualitative verification of the control held by the founders. Sometimes it is this maximum dilution aspect of founders that prevails and the valuation then becomes “simple as that”. In the end, it’s all the ancillary matters that take time to be negotiated: how the money will actually be injected into the company (cash, loan, subordinated loan, etc.), the preferences granted to investors, the conditions under which employees can receiving stock or stock options, what the stock value of a departing founder will be… So many subjects that could be the subject of articles in their own right! Matthieu Remy, CEO and co-founder of Easy Vest

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