How do I value a new company that is less than a year old (does not have financial records or earning trends) for the purpose of valuing the shares of proposed new investors in the company?
Valuation in these cases is mainly a matter of negotiation. Your company is valued at the value you can convince investors to buy in at. The math is simple. Divide the money you’re asking for by the percentage of the company you’re offering to calculate the valuation. It’s that annoyingly simple. For example, if you want to give them 50 percent of the company for $1 million, you’re valuing the company at $2 million. Or $125,000 for 10 percent means valuing the company at $1.25 million.
The more numbers you can throw on it to justify, the better. Eyeballs? Increase in traffic? Initial sales? Backgrounds of the founders? But don’t think there’s some formula in the background that everybody will turn to. You’re absolutely right; you don’t have history.
What would be nice would be to compare your venture to valuations achieved by other, similar ventures in similar situations. That’s a tough one, though, because those deals are rarely made public. Visit The Funded and see what you can find there, and do a Google search on VC valuation and see what turns up. You should also search the Ask the VC blog as well. Read everything Brad and Jason say there about early-stage valuations.