Starting A Company Without Raising Money Pt. 2

I got some good feedback on my question posted yesterday.

Ed Costello:

This is just my opinion and has no factual support whatsoever, consult an attorney, do not read while operating nuclear machinery, etc., but:

• You won't have a sense of the value of your company until after you're up and running and potentially earning revenue. It's possible to have value without revenue if you're developing some sort of unique intellectual property which would have value separate from your company.
• You own the company, you and your co-founder can decide how much equity you're willing to give to advisors in return for their advice and support, create your pool of shares from there.
• If your advisors are holding out for a specific dollar amount or percentage of equity, I suggest you look for other advisors.
• Keep it simple enough to bring advisors onboard without wasting too much time. The more complex you make it, the more billable hours you'll pay for.
• Reward your advisors, but don't give away the store. They're offering advice, answering questions from experience, but they're not running the company, they're not risking their own investments nor representing other investors. Reward them for their help (if they've made a meaningful contribution) but don't think of it as paying for their services or support or advice, it's a gratuity.

Lindsay Watt:

Here are two thoughts for you:

1) Find some companies that have had a public Series A/Angel Investment that you know of and compare yourself to them

-You can likely find some companies that are similar to yours (try going to PEHub.com and trolling their archives)

-You can assume that most angels/VCs will likely take 25-50% of the company. Therefore if a company received $500K, the total valuation was likely $1-2M

2) Valuing illiquid companies is a black art

-I'm guessing you have no/minimal/negative cash flow but huge (yet uncertain) growth prospects. There's no way you can value your company using any of the traditional tools like free cash flow, etc. so you're just going to have to accept that if you want to offer equity the price is going to be very subjective (and to a certain extent it will be pulled out of your ass). Try getting some data in part A and then you'll have more ammunition to support whatever price you eventually come up with.

I like the idea at looking at the valuation of similar companies and assigning a similar valuation based on that. PEHub.com has been helpful.

It also makes sense to keep this very simple. My advisers are just that, advisers, not employees and I'm super excited to start talking to a few people about how they can help us.