Startup Valuation: Methods, Multiples, and Negotiation

"What's your company worth?"

At early stages, the honest answer is: whatever someone will pay for it.

But there's method to the madness. Here's how startup valuations actually work.

Pre-Revenue Valuation Methods

1. The Berkus Method

Assign up to $500K for each factor:

| Factor | Max Value | |--------|-----------| | Sound idea | $500K | | Prototype | $500K | | Quality team | $500K | | Strategic relationships | $500K | | Product rollout/sales | $500K |

Max pre-revenue valuation: $2.5M

Simple but subjective. Best for very early stage.

2. Scorecard Method

Compare to average pre-money valuations, then adjust:

| Factor | Weight | Your Score | Adjustment | |--------|--------|------------|------------| | Team | 30% | 125% | +7.5% | | Market size | 25% | 100% | 0% | | Product | 15% | 80% | -3% | | Competition | 10% | 100% | 0% | | Sales/Marketing | 10% | 50% | -5% | | Other | 10% | 100% | 0% |

If average pre-seed valuation is $5M, and your total adjustment is -0.5%, valuation = $4.975M.

3. Risk Factor Summation

Start with a base valuation, then adjust ±$250K per risk:

| Risk Factor | Your Assessment | Adjustment | |-------------|-----------------|------------| | Management | Average | $0 | | Stage of business | High risk | -$250K | | Competition | Low risk | +$250K | | Manufacturing | N/A | $0 | | Sales | Average | $0 | | Funding | High risk | -$250K | | Technology | Low risk | +$500K |

Base: $5M, Net adjustment: +$250K = $5.25M valuation

4. Cost-to-Duplicate

What would it cost to build this from scratch?

• Developer time × market rate
• Design/research costs
• IP/patent value
• Prototype costs
• Customer acquisition costs

Generally gives a floor value, not ceiling.

Revenue-Based Valuation

Once you have revenue, multiples take over.

ARR Multiples

The standard for SaaS companies:

Valuation = ARR × Multiple

| Stage | Typical ARR Multiple | |-------|---------------------| | Seed | 10-30x | | Series A | 15-40x | | Series B | 10-20x | | Series C+ | 8-15x | | Public SaaS | 5-15x |

Multiple Drivers

Not all ARR is valued equally:

| Factor | Impact on Multiple | |--------|-------------------| | Growth rate (higher = better) | +++ | | Net revenue retention (>100% = better) | ++ | | Gross margins (>70% = better) | ++ | | Market size | + | | Competitive position | + | | Churn rate (lower = better) | + | | CAC payback (shorter = better) | + |

A $5M ARR company growing 100% YoY with 120% NRR might command 40x. Same revenue growing 30% with 90% NRR might get 10x.

The Rule of 40

Growth Rate + Profit Margin ≥ 40%

| Growth | Margin | Total | Assessment | |--------|--------|-------|------------| | 80% | -40% | 40% | Acceptable | | 40% | 0% | 40% | Healthy | | 20% | 20% | 40% | Sustainable | | 15% | 10% | 25% | Below par |

Companies exceeding Rule of 40 command premium multiples.

Stage-Specific Valuation Ranges

Pre-Seed ($0-250K raise)

Typical valuation: $2-6M pre-money

Factors that matter:

• Founder background
• Market opportunity
• Early validation
• Team completeness

Seed ($500K-2M raise)

Typical valuation: $5-15M pre-money

Factors that matter:

• Product progress (MVP, beta, launched)
• Early traction metrics
• Market validation
• Team experience

Series A ($5-15M raise)

Typical valuation: $15-50M pre-money

Factors that matter:

• Clear product-market fit
• Repeatable sales motion
• Strong unit economics
• Path to $100M ARR

Series B ($15-50M raise)

Typical valuation: $50-200M pre-money

Factors that matter:

• Proven scalability
• Strong revenue growth
• Operational metrics
• Market leadership indicators

Valuation Negotiation Tactics

For Founders

1. Create Competition Multiple term sheets = leverage. Even interest from other investors helps.

2. Know Your Numbers Cold Investors test you. Know every metric without checking notes.

3. Anchor High Start higher than target. Negotiation typically moves down.

4. Focus on Post-Money "$10M on $40M post" is clearer than "$10M on $30M pre."

5. Non-Valuation Terms Matter

• Liquidation preference (1x vs 2x)
• Anti-dilution provisions
• Board seats
• Pro-rata rights

A $15M valuation with 2x liquidation preference may be worse than $12M with 1x.

Red Flags from Investors

Watch out for:

• 🚩 Participating preferred
• 🚩 Full ratchet anti-dilution
• 🚩 Excessive board control
• 🚩 Broad protective provisions
• 🚩 Unreasonable vesting acceleration triggers

Valuation Isn't Everything

| Scenario | Pre-Money | Raise | Dilution | Post-Money | |----------|-----------|-------|----------|------------| | A | $15M | $5M | 25% | $20M | | B | $20M | $5M | 20% | $25M |

Scenario B is better, right?

Not if Scenario A includes:

• Experienced investor with helpful network
• Better terms (1x vs 2x liquidation)
• Follow-on commitment
• Strategic value

The best investor at a lower valuation often beats a worse investor at higher valuation.

Down Rounds

When new valuation < previous valuation:

Impact:

• Existing investors get diluted more (or have anti-dilution protection)
• Employee options may be underwater
• Signal to market is negative
• But: company survives

Better a down round than no round.

Calculate Your Ownership

Model different scenarios with our tools:

• Equity Calculator - Calculate option values at various valuations
• Dilution Simulator - See how future rounds affect your stake
• Runway Calculator - Plan when to raise

Key Takeaways

1. Pre-revenue valuations are mostly art - use multiple methods
2. ARR multiples drive post-revenue valuations - growth and retention matter most
3. Rule of 40 is the health check - growth + margin ≥ 40%
4. Terms matter as much as valuation - watch liquidation preferences
5. Create leverage - competition is your friend

Related Reading:

• Cap Table 101
• The Mathematics of Founder Equity
• Understanding Dilution