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It seems like a simple question, but valuing a startup is actually very complicated. Most people (especially lawyers) are surprised to learn that companies can have multiple valuations at the same time. Here is an oversimplified example of what I am talking about.

Let’s say your company owns some office furniture and a novel patent. If you had to liquidate today you might be able to get someone to pay $1M for everything. So it would be fair to value the company at $1M. Now let’s say that you visit with a venture capital firm and convince them to invest $5M into the company. They’ll demand about 30% of the company so you’ll both agree that the company’s pre-money valuation is around $18M. Given that a professional investor is investing millions of dollars in the company at a set price it is fair to value the company at that price. Now let’s say that you want to issue stock options in the company to your employees. You’ll need to do a 409A valuation before issuing them. After paying a valuation firm about $1,500, they’ll determine the value of the stock options you’re giving to your employees. If you sold preferred shares to the VC at $1.00 each, the valuation firm will likely suggest that your common shares are only worth about .10 each (i.e. 10% of the value of the preferred shares). Suddenly the company that just raised $5M with a post-money valuation of $23M is actually worth a lot less in the eyes of the valuation firm – around $8M. Now let’s say that the company secured a government contract and that will generate $10M in EBITDA per year. An acquirer tenders an offer to buy the company for 3X cashflow – i.e. valuing the business at $30M.

So this company has been valued at $1M, $18M, $23M, $8M and $30M. So how a company is valued has more about why than what. Get it?