**Aifora’s €3M Raise Requires €30M in Revenue**

Why would you want to know your valuation? So you know how many shares you have to give away when you raise money with an investor.

Assume you want to raise 400,000. Assume the valuation of your startup is 1,361,772. Then you have to give away 400,000 / 1,361,772 = 29.4% of your shares to the investor.

You can raise this 400,000 either with equity or a convertible.

Assume you raise this money by issuing equity. [Read this if you do a convertible]

Then you can value your startup in 38 steps.

Yes, that is a lot. But what are your options?

Should you take a guess? Good chance that your valuation is either too high or too low. A valuation that is too high means giving away too few shares. Giving away too few shares means no deal. A valuation that is too low means giving away too many shares. Who wants that?

Or should you ask the investor? That’s like asking someone how much he would pay for your house. What do you think? Will he come up with the highest price? Or will he try to lowball you?

Anyways. About those 38 steps.

To simplify only the first 6 months are shown. Assumptions are in blue. Calculations are in black.

How many products will you sell each month? To simplify rounded numbers are shown. Calculations use the unrounded numbers.

What is the price per product?

Products/month in month 1 is 1. Price/product in month 1 is 2,000. So cash in/month in month 1 equals 1.1 * 2,000 = 2,000.

What is the cash out each month?

Cash in/month in month 1 is 2,000. Cash out/month in month 1 is -24,219. So cashflow in month 1 equals 2,000 + -24,219 = -22,219.

Cash end in month 0 is 0. So cash begin in month 1 equals 0. Cashflow in month 1 is -22,219. Equity in month 1 is 0. So cash end in month 1 equals 0 + -22,219 + 0 = -22,219.

When is your startup significantly de-risked? Assume with each 10x in products/month.

A very crude rule of thumb: 10x for software and 5x for hardware. Products/month in month 0 is 0. So the first milestone would equal 0 * 10 = 0 products/month. That doesn’t work. Therefore, if products/month in month 0 is 0, temporarily assume it is 1 when you define milestones. So milestones are:

- 1 * 10 = 10 products/month
- 10 * 10 = 100 products/month
- 100 * 10 = 1,000 products/month
- Etc.

Look up each milestone in your cashflow planning.

You have 3 milestones:

- 10 products/month in month 24
- 100 products/month in month 48
- Because 1,000 products/month is outside your 60-month horizon, use the 316 products/month in month 60

Before investment, you have a negative cash balance.

How much money do you need to achieve each milestone?

_Milestone 1_To get from 0 products/month in month 0 to 10 products/month in month 24, you need to raise a Series Seed of 400,000 in month 0. This keeps your cash balance at 0 or more.

_Milestone 2_To get from 10 products/month in month 24 to 100 products/month in month 48, you need to raise a Series A of 1,000,000 in month 24.

_Milestone 3_To get from 100.0 products/month in month 48 to 316 products/month in month 60, you don’t need to raise any more money in month 48. Your cash balance is already 0 or more.

Which instrument will you use for your Series Seed: equity or a convertible? Assume you raise your Series Seed with equity. [Read this if you do a convertible]

Assume your raise your Series A with equity.

Map out the rounds identified in the previous step. Include the exit.

Cash in/month in month 60 is 632,000 (from cashflow planning). So revenue/year @exit equals 12 * 632,000 = 7,584,000.

How much are investors willing to pay for a company in your region and industry, with a revenue/year of 7,584,000? Assume 4.0x revenue/year (market data).

So enterprise value @exit equals 7,58400 * 4.0 = 30,336,000.

Cash end in month 60 is 3,684,194 (from cashflow planning). So equity value @exit equals 30,336,000 + 3,684,194 = 34,020,194.

How much does the Series A investor want to make on his portfolio? Assume the IRR/year on his portfolio is 20.0% (market data).

The Series A investor exits after (60 –24) / 12 = 3.0 years.

So the Series A investor wants a money multiple on his portfolio of (1 + 20.0%) ^ 3.0 = 1.7.

How many milestones does the investor have till exit? The Series A investor invests at 10 products/month in month 24 (from cashflow planning). So he has 2 milestones till exit:

- 100 products/month in month 48
- 316 products/month in month 60

What’s the probability to get from one milestone to the next? Either you get there, or you don’t. So 50/50.

Assume a 50.0% probability to get from 10 products/month in month 24 to 100 products/month in month 48. And assume a 50.0% probability to get from 100 products/month in month 48 to 316 products/month in month 60.

So the probability to get from 10 products/month in month 24 to 316 products/month in month 60 is 50.0% * 50.0% = 25.0%.

So the Series A investor has a sub (for lack of a better word) of 1.7 / 25.0% = 6.9.

Because there are no more shares issued after the Series A, the investor retains 100.0% of his initial share percentage.

So the Series A investor wants a money multiple on your startup of 6.9 / 100.0% = 6.9.

So your startup has a post-money valuation @Series A of 34,020,194 / 6.9 = 4,921,903.

Investment @Series A is 1,000,000 (from cashflow planning). So you have to give away 1,000,000 / 4,921,903 = 20.3% of the shares to the Series A investor.

How much does the Series Seed investor want to make on his portfolio? Assume the IRR/year on his portfolio is 20.0% (market data).

The Series Seed investor exits after (60 — 0) / 12 = 5.0 years (from cashflow planning).

So the Series Seed investor wants a money multiple on his portfolio of (1 + 20.0%) ^ 5.0 = 2.5.

The Series Seed investor invests at 0 products/month in month 0 (from cashflow planning). So he has 3 milestones till exit:

- 10 products/month in month 24
- 100 products/month in month 48
- 316 products/month in month 60

Assume a 50.0% probability to get from 0 products/month in month 0 to 10 products/month in month 24. Assume a 50.0% probability to get from 10 products/month in month 24 to 100 products/month in month 48. And assume a 50.0% probability to get from 100 products/month in month 48 to 316 products/month in month 60.

So the probability to get from 0 products/month in month 0 to 316 products/month in month 60 is 50.0% * 50.0% * 50.0% = 12.5%.

So the Series Seed investor has a sub of 2.5 / 12.5% = 19.9.

Because there are more shares issued after the Series Seed, the investor retains 100.0% — 20.3% = 79.7% of his initial share percentage.

So the Series Seed investor wants a money multiple on your startup of 19.9 / 79.7% = 25.0.

So your startup has a post-money valuation @Series Seed of 34,020,194 / 25.0 = 1,361,772.

1,361,772.

OMG, finally! That’s how you value your startup when issuing equity. Now you know how many shares you have to give away. And now you can compare issuing equity against doing a convertible.

*Thanks to Chretien Herben.*

*Joachim Blazer is the author of* *The #1 Guide to Startup Valuation**.*

L O A D I N G

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