Valuation of the seed round with friends and family
Posted on 06. Oct, 2008 by squareroots in Pre Venture Capital
The balance between the founders and the investors is critical for any early stage company. This is true even with investments from friends and family. Consider two situations:
High pre-money valuation
Example: a pre-money valuation of $10M for a pre-revenue software company. Although this would appear to favor the company and the founders, what may result is an inability to raise money in the future from angel investors or venture capitalists. Professional investors sometimes avoid companies where an unjustified high valuation would require a “down round” to correct to market valuations.
Low pre-money valuation
Normally this dilutes the founders, which can be fixed with stock options. However, it may be a flag of inexperience to investors in future rounds.
As part of due diligence, investors will ask about an entrepreneur’s previous startup experience. Especially important is when they ask about the returns for investors in these earlier companies.
External Links
Collection of articles on angel investing
Do VCs like Angel backed companies by Brad Feld
Another VC takes on the same topic by Fred Wilson
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