How to Calculate Your Seed-Stage Startup Valuation (2024)

FAQs

How do I calculate my seed stage startup valuation? ›

The Components of a Seed Funding Valuation

Pre-money valuation is the value of the company before the investment is made. This is calculated by taking the total value of the company and subtracting the value of the shares that will be sold to the investor.

In calculating valuation, investors will start by finding similar companies and calculate their valuation to revenue ratio, known as the multiple. They will determine this figure by finding out how many times the valuation is bigger than revenue. Investors will multiply your company's revenue by that multiple.

Seed rounds are typically between $2–$5 million with a post-money valuation between $20–$30 million. Though some seed funding is done on Simple Agreement for Future Equity (SAFEs) and convertible notes, the seed round is often the first round of equity financing.

By the numbers: Median pre-money valuations for seed-stage rounds in Q1 jumped to $12.9 million — up 16.9% from the previous quarter and 28.6% year-over-year, per PitchBook.

Seed funding starts to slip

After peaking in 2022 at $2.5 million, the median U.S. seed round dipped to $2.3 million in Q1 2023. The average dipped slightly from $3.7 million to $3.6 million. Of course, that's still far above where those deal sizes were less than a decade ago.

The general rule of thumb for angel/seed stage rounds is that founders should expect to sell between 10% and 20% of the equity in the company. These parameters weren't plucked out of thin air. They're based on what an early equity investor is looking for in terms of return.

The average pre-seed startup valuation can fall between $500k-5m and the average pre-seed round between $100k-1m — but the total raised can vary hugely depending on how developed your proof of concept is, who exactly the investors are and what sector you're in.

How Much Equity Should be Given Away in a Seed Round? A general rule of thumb is giving away between 10-20% equity during a seed round. This may likely be to angel investors who are willing to put in checks right at the origin of a company during the early stages.

For example, if the pre-money valuation of a startup is $1m and the investor puts in $250k, the post-money valuation will be $1.25m — and the investor receives 20% of the company (250k / 1.25m). But if $1m is a post-money valuation, then the investor will own 25% of the business.

What is a valuation formula? ›

The valuation formula for a relative value calculation is: Value = (Earnings Before Interest and Taxes) / (Interest Expense + Tax Rate) Where: EBIT = earnings before interest and taxes. Interest Expense = the company's interest expense for the last 12 months.

The simplest way to value an early stage startup is through comps; but businesses are unique, so accuracy is low. Get additional inputs by working backwards from how much cash you need and the ownership investors will ask for.

Seed stage funding is the initial surge of capital into the business. At this point, a startup is largely an idea and will have little to no revenue. This stage is generally when a product and go-to-market strategy are being built and developed.

Seed stage funding is typically provided by angel investors, venture capital firms, or crowdfunding platforms. The funding amount in seed stage can range from a few hundred thousand to a few million dollars, depending on the startup's valuation and funding requirements.

Founders start with 100 percent ownership. Seed rounds – the earliest stage of funding, usually from family and angel investors – typically dilute founders' ownership by an average of 15%.

Typically, these investors put $25,000 to $50,000 into each company. In less common cases, the range can go as low as $10,000 and high as $100,000. For a full portfolio of as many as 20 companies, an angel investor must be comfortable with investing from $200,000 to $500,000.

The average amount of funding raised in a seed round is $2.2 million, but it can be as low as $100,000 or as high as $5 million. The exact amount of funding to raise is up to you as the founder.

60% of startups fail between pre-seed and Series A funding stages.

The term “seed round” refers to investments in which no more than 15 investors provide early funds to start a new company.

In fact, the 90/10 Rule tells us that during small business startups, 90% of your time should be spent on direct marketing activities and only 10% on building technical skills. The type of small business startup activities to spend 90% of your time on include: Prospecting. Lead generation.

What is the 40 percent rule for startups? ›

The Rule of 40 is a principle that states a software company's combined revenue growth rate and profit margin should equal or exceed 40%. SaaS companies above 40% are generating profit at a rate that's sustainable, whereas companies below 40% may face cash flow or liquidity issues.

The exact value of a business with $1 million in sales would depend on the profitability of the business and its assets. Generally, a business is worth anywhere from one to five times its annual sales. So, in this case, the business would be worth between $1 million and $5 million.

Investors in the pre-seed round are typically friends and family or business angels, with investments ranging from $50,000 – $200,000 for a 5% – 10% equity stake. They provide you with enough runway to develop your MVP.

“And then you have what's called 'the employee pool' and that will be a number of shares that are basically reserved for employees.” Reuben says that it's typical for employee stock option pools to account for 10 to 15% of the company's overall available equity — though in some cases it can be as high as 20%.

Because → Series A investors will typically expect 50% owned by active founders and employees. Why? You get the drill.

Three main types of valuation methods are commonly used for establishing the economic value of businesses: market, cost, and income; each method has advantages and drawbacks.

It is calculated by multiplying the company's share price by its total number of shares outstanding. For example, as of January 3, 2018, Microsoft Inc. traded at $86.35.2 With a total number of shares outstanding of 7.715 billion, the company could then be valued at $86.35 x 7.715 billion = $666.19 billion.

20% of the proceeds after first deducting any qualifying expenditure incurred after the valuation date.

The majority of the time, startup businesses evaluate their growth based on the revenue they foresee generating in the future. Using the forecasted cash flow, the investors calculate the margin and estimate the worth of the cash flow.

What is a startup valuation sheet? ›

Otherwise known as the 'net book value', this startup valuation model simply indicates the carrying value of company assets on its balance sheet. While this method is not the most accurate valuation method for your company, it is quick and easy to calculate and give you a ballpark estimate of the value of your company.

The market approach to business valuation is categorized into four distinct methods- Market price Method, Comparable Companies Method, Comparable Transaction Method, and EV to Revenue Multiples Method.

This course examines in detail the five key property valuation methods: comparison, investment, residual, profits, and cost-based.

The valuation cap is a way to reward seed stage investors for taking on additional risk. The valuation cap sets the maximum price that your convertible security will convert into equity. To translate that into a share price, you divide the valuation cap by the series A valuation.

There are two leading qualitative valuation methods for pre-seed investments: the Berkus Method and the Payne Scorecard Method. These methods use a similar technique to break down the business into 5 to 7 areas and subjectively grade each company area.

In fact, less than 10% of companies that raise a seed round are successful in then raising a Series A investment. A Series A investment provides venture capitalists, in exchange for capital, the first series of preferred stock after the common stock issued during the seed round.

This means that up to 70% of startups fail on the pre-seed stage and 50% of startups fail on every stage until they reach the series D stage.” Once pre-seed funding, it's time to raise investments in round A.

The TLDR; seed investors shoot for a 100x return; Series A investors need an investment to return 10x to 15x and later stage investors aim for 3x to 5x multiple of money. This translates into portfolio returns from 20% to 35% targeted IRRs.

The purpose of a pre-seed pitch deck is simple: to convince potential investors to take meetings with you. It's one of the primary tools founders use to convince investors of their company's value, and it lets them structure their company narrative in a way that's more likely to capture VC attention.

What is a small amount of seed money? ›

Seed money is usually used to fund a business during its launch phase when it's small but full of promise (just like a seed). This form of early-stage financing helps startups grow faster and overcome barriers more efficiently, paving the way for future financing from venture capitalists or an IPO.

All things being equal, though, a typical seed round valuation for a pre-revenue startup is between $5 million and $10 million. For a revenue-generating startup, the typical valuation range is between $10 million and $20 million.

How Much Equity Should be Given Away in a Seed Round? A general rule of thumb is giving away between 10-20% equity during a seed round. This may likely be to angel investors who are willing to put in checks right at the origin of a company during the early stages.

The average pre-seed startup valuation can fall between $500k-5m and the average pre-seed round between $100k-1m — but the total raised can vary hugely depending on how developed your proof of concept is, who exactly the investors are and what sector you're in.

The percentage of startups raising at a higher valuation than their previous round — an upround — dropped in Q1 2023, to 71%. The dreaded downround — where a company raises at less than its previous valuation — and flat rounds increased, up to 18% and 9% respectively.

60% of startups fail between pre-seed and Series A funding stages. There are three note-worthy stages for startups: pre-seed, Series A, and maturity.

Investor community StartEngine recommends that companies aim to raise their seed round "when they have less than $3 million annual recurring revenue (ARR).” The average amount of funding raised in a seed round is $2.2 million, but it can be as low as $100,000 or as high as $5 million.

Up to this point, generally speaking, with teams of less than 12 people, the average granted equity for startup employees is 1%. This number can be as high as 2% for the first hires, and in some circ*mstances, the first hire(s) can be considered founders and their equity share could be even greater.

Typically, 10–20% of equity is advised by financial experts as the percentage of the equity to give up during a seed round. Anything above 30% may be too much.

The short answer to "how much equity should a founder keep" is founders should keep at least 50% equity in a startup for as long as possible, while investors get between 20 and 30%. There should also be a 10 to 20% portion set aside for employee stock options and, in some cases, about 5% left in a reserve pool.