Some Thoughts on Company Valuations
Your valuation must fit within our risk/reward expectations for angel investments. Typically, we look for pre-money valuations below £2m, and from as little as £250K. It is unusual for the Cambridge Angels to consider a pre-money valuation higher than £2m, and the vast majority of our seed investments have been made based on pre-money valuations in the £500K - £1m range. However, if your company has existing revenues, has issued patents and can demonstrate impressive sales growth then we will consider investing at a higher pre-money valuation.
Full Dilution
In arriving at the pre-money valuation, we take into account the effect of all commitments to issue shares (i.e. the ‘fully-diluted’ number of shares). More specifically, the fully-diluted number of shares includes all shares that you would issue if all unconditional and contingent commitments to issue shares were to be given effect (e.g. exercise of share options and warrants, conversion of preferred shares, exchange of debt for equity, etc.). It is also worth noting that the Cambridge Angels encourages start-ups to reserve a reasonable number of shares for a stock option pool to help sign up the ‘key hires’ needed to ensure your Management Team has the right mix of skills to give you the best chance of success in your chosen markets.
Pre-Money and Post-Money Valuations
In simple terms, the pre-money valuation is the value you put on your company before securing the additional capital you seek through your next funding round. To calculate your pre-money valuation, multiply the number of fully-diluted shares immediately prior to the proposed financing by the price/share of the proposed financing to yield the pre-money valuation. To arrive at the post-money valuation, simply add the additional capital sought to the fully-diluted pre-money valuation.
Alternatively, if you are more comfortable with offering a certain percentage of your company for a certain amount of investment, simply divide the proposed financing by the percentage offered to arrive at the post-money valuation, then subtract the additional funding from this post-money valuation to calculate your pre-money valuation.
These are just two different ways to calculate the same valuation, hence they yield identical results.
Investment Value vs. Company Valuation
It is important to bear in mind that early stage investors such as the Cambridge Angels are likely to have their equity interest in your company diluted (i.e. made smaller) by later investors. For example, if our Members invested £500,000 at a pre-money valuation of £1m during your “Angel Round” of financing, then we would own 33% of your company when this round is closed.
However, if a Venture Capital firm subsequently invests £5m the following year at a £5m pre-money valuation, the Cambridge Angels would own just half as much of your company after this “VC Round” even though your company value has more then tripled in value from the Angel Round post-money valuation of £1.5m.
As a result, because of the early stage at which we invest, it is worth being aware that the Cambridge Angels generally receive 20-40% of any given company’s fully diluted equity in exchange for investing at such an early (and therefore high-risk) stage of your company’s development.
Your valuation must fit within our risk/reward expectations for angel investments. Typically, we look for pre-money valuations below £2m, and from as little as £250K. It is unusual for the Cambridge Angels to consider a pre-money valuation higher than £2m, and the vast majority of our seed investments have been made based on pre-money valuations in the £500K - £1m range. However, if your company has existing revenues, has issued patents and can demonstrate impressive sales growth then we will consider investing at a higher pre-money valuation.
Full Dilution
In arriving at the pre-money valuation, we take into account the effect of all commitments to issue shares (i.e. the ‘fully-diluted’ number of shares). More specifically, the fully-diluted number of shares includes all shares that you would issue if all unconditional and contingent commitments to issue shares were to be given effect (e.g. exercise of share options and warrants, conversion of preferred shares, exchange of debt for equity, etc.). It is also worth noting that the Cambridge Angels encourages start-ups to reserve a reasonable number of shares for a stock option pool to help sign up the ‘key hires’ needed to ensure your Management Team has the right mix of skills to give you the best chance of success in your chosen markets.
Pre-Money and Post-Money Valuations
In simple terms, the pre-money valuation is the value you put on your company before securing the additional capital you seek through your next funding round. To calculate your pre-money valuation, multiply the number of fully-diluted shares immediately prior to the proposed financing by the price/share of the proposed financing to yield the pre-money valuation. To arrive at the post-money valuation, simply add the additional capital sought to the fully-diluted pre-money valuation.
Alternatively, if you are more comfortable with offering a certain percentage of your company for a certain amount of investment, simply divide the proposed financing by the percentage offered to arrive at the post-money valuation, then subtract the additional funding from this post-money valuation to calculate your pre-money valuation.
These are just two different ways to calculate the same valuation, hence they yield identical results.
Investment Value vs. Company Valuation
It is important to bear in mind that early stage investors such as the Cambridge Angels are likely to have their equity interest in your company diluted (i.e. made smaller) by later investors. For example, if our Members invested £500,000 at a pre-money valuation of £1m during your “Angel Round” of financing, then we would own 33% of your company when this round is closed.
However, if a Venture Capital firm subsequently invests £5m the following year at a £5m pre-money valuation, the Cambridge Angels would own just half as much of your company after this “VC Round” even though your company value has more then tripled in value from the Angel Round post-money valuation of £1.5m.
As a result, because of the early stage at which we invest, it is worth being aware that the Cambridge Angels generally receive 20-40% of any given company’s fully diluted equity in exchange for investing at such an early (and therefore high-risk) stage of your company’s development.
