Ask YC: I'm pitching to an angel. How do I value my startup?

[disclaimer]Mind you, I'm on the outside looking in. I really haven't started the startup funding shuffle yet, but I've read compulsively. And, this is what I've gleaned. YMMV.[/disclaimer]<p>First, a few important questions.<p>Do you have revenue? How many users? How fast have your been growing? Proprietary patentable technology, or a user focused tool built on open source? I'd say that how many people are on the team, and how long you've been coding is rather unimportant. What is most important is what you have in hand.<p>What is a startup worth? Ultimately what the market is willing to pay for it. So, it's worth whatever you're willing to sell a stake of it for, and whatever the angel is willing to buy a stake for. It all depends where the investors and the market are at in the greed &#60;--&#62; fear continuum. Right now, I get the impression that we're towards the end of the greed spectrum, and we'll be swinging back to fear soon. I know that's not very helpful, but ultimately it's all voodoo and people's best guesses. But, there are a few guidelines.<p>It helps to have a base case. Take for example YC funded companies:<p>Y Combinator offers $5,000 n + $5,000 where n is the number of founders for a 5-20% stake in a startup. That's usually for a group of founders with an idea, a prototype or maybe a little bit of code and a few users. That means that 0-6 months ago, had you been funded by YC, here's what your company would have been worth:<p>$5,000 x 2 founders + $5,000 = $15,000 for a 5-20% stake in your company. If $15,000 is worth 5-20% of your company, that means that your company was worth $75,000 to $300,000. Here's the formula:<p>startup value = investment/stake<p>or in the above YC case:<p>value = $15000/5% = $75000 at the low end<p>or<p>value = $15000/20% = $300,000 at the high end<p>Does this make sense? Someone please correct me if I'm wrong, but this is pretty much how I understand it's done.<p>If you have more traction than a typical YC group, i.e. more users, unique technology, revenue streams, strong code base, etc... Then, you're probably worth more than the $75,000 - $300,000 valuation. If you have more traction, you're probably looking at a 300,000 - 1,000,000 valuation. If you have less or as much traction, you're looking at the YC range.<p>Anybody else have any thoughts on the matter?

Often the usual response is something similar to "we are anxious to go through a formal valuation process should we determine this is an appropriate possible investment." It's certainly a bit of a chicken answer, but you can provide numbers such as revenue, product developments, and users to give an idea of what a proper valuation would be. The idea is to not price yourself out of their range during the first conversation.

You might want to consider punting on the question altogether by taking angel money as convertible debt instead of equity.

Don't. Say something like "I want to keep x% of the company". Thus if you end up getting more funding than you initially expected (happens often) you'll essentially get a higher val.

Don't get locked on the pre-money valuation: the other terms tend to have a much bigger impact on how much you actually make.<p>What's your plan for paying the investor back? Will you need a follow on round? How much, when, and why. What risks about your startup will you have reduced before you need to raise another round. Can you be acquired based on what you will achieve with this first round.<p>Have you talked to other teams this investor has worked with? You have to assign a value to the expertise, advice, and connections that this investor will bring. Most angel investors supply more than money. That's one of the reasons teams want to take money from Ycombinator, they have a well defined methodology and a constellation of other folks they can connect you with who can help you succeed.<p>You are negotiating the start of a relationship that will normally only end when your firm goes bankrupt or is sold: this is not a transaction this is a long term partnership.

How much money are you trying to raise?