1. Pre-and Post-Money Valuations
If you are an entrepreneur that is seeking $250,000 investment and you are willing to give up 1/3 of your company and your valuation of your company is $750,000. An Angel investor may ask how you can justify a valuation of $750,000.
In reality, an entrepreneur is valuing their company at $500,000 and this is the pre-money valuation or the valuation before the investment. This is what you, as the entrepreneur needs to justify. Once the investment is made, the company would be valued at $750,000 with $250,000 of that coming from the investor.
2. Company Valuations
What are company valuations based on in startup or early-stage companies?
Valuation amounts are generally placed on things such as management, market potential, intellectual property and a few other key essentials. Sales can help justify a higher valuation, but sales generally are given very little weight for startups and early-stage companies.
3. Realistic Time Frames
Angel investors typically do not agree on deals quickly and deals of any real merit are very rarely done without a significant amount of due diligence to help verify claims and to check out the entrepreneur. The idea of a quick shake and sudden influx of capital is not typical for Angel investors. Angels do not make money by blindly rushing into business deals but spend their time checking out the entrepreneur and doing their due diligence to verify claims.
When negotiating with an Angel for investment the focus is not only on the valuation of the company and the investment amount but rely on a wide array of cornerstones like stock options, liquidation preferences and more.
5. Relationship with Angels
Both Angels and entrepreneurs are interested in the same thing – to build a successful company with terms that provide mutual benefit and long-term growth.