What is Valuation?
When a startup tries to raise capital, it needs to base its request on the valuation of the company. In other words, how much the company is worth. For bigger companies, this can easily be defined by the number of sales or the worth of tangible and non-tangible assets. However, startups usually don’t possess any of these, let alone positive cash flows in financial reports. Instead, the standard metric for startups is to use a 5 times multiplier for their annual revenue. Based on this the startup offers shares of the company in return for the investment.
This valuation is being pitched to investors, while the investor also has a valuation calculated for the company. If these valuations are not aligned, the investor can be offered a convertible note.
