A startup can raise money in various ways, including loans, crowd funding or venture capital. ξA startup will typically sell equity in their venture to investors in exchange for cash. ξTo determine how much equity an investor will get, a startup needs to determine their valuation. ξThis article summarizes how to valuate an early stage startup.

At the beginning, the founders own 100% of the equity. However, ξpart of that equity is sold to investors with invested cash.

The following formula determines the valuation of the company:

Investor's Equity = Startup valuation (pre money valuation) + Investment Amount / Investment Amount

Investors tend to want to lower the pre investment valuation so that they get a larger percentage of equity in the event that the startup gets acquired for a larger amount of money later on.

Key employees may also be given stock options as additional compensation for the startup's early efforts and for taking a risk to work with the startup. ξStock options are also given to employees when salaries and benefits are lower than market rates for a startup.

The following factors play into the valuation of an early stage startup:

• Founders - whether the founders have any experience.

• Team - what are the key employees and resources.

• Management - what is the quality of the management team?

• An idea that solves a need in the market place

• Market Size - how large of a market and what is the potential?

• Prototypes and product demos

• Proven technology

• Proven business model or revenue generator

• Unique Value Proposition or Mission Statement

• Social Enterprise?

• Customers

• Intellectual property

• Skilled team

• Market Innovation

• Cash Invested

• Stage of Startup - idea stage, product or services developed and tested... or is the startup further along?

• Competition - does the startup have a unique factor and able to differentiate itself from the competition?

• Team's ability to execute

• Market timing

• Funding plan

• Exit Potential - is there a potential for a buyout within 5 years?

• Board of Directors and Advisors

• Sales and marketing plan

There are various methods to valuate a startup. ξThey include:

• ŒæValuation comparisons to similar companies in the same industry at the -re money deal. ŒæWebsites such as www.angel.co, www.crunchbase.com and www.news.ycombinator.com/news and www.gust.com are helpful.

• Startup:

• Industry:

• Niche:

• Founder Experience:

• Company Location:

• Customer Traction:

• BDB or B2C:

• Stage of Development:

• Funding to Date:

• Team Members:

• Valuation

• Market Size

• Scalability

• More than One Founder Committed full time

• Customer development plan

• Business model validated by paying customers

• Significant industry partnerships

• Execution plan

• Intellectual Property

• Competitive