Calculating Pre-Money Valuation for Startup
"Since you have no sales, I'd likely question how well could you determine the value of the company's assets in a reasonable fashion. You may be better to estimate sales and discount that back to a current valuation. For example, insurance companies could determine that if you wanted to be paid $x/month for the rest of your life, the present day value of that is $y. There are similar mechanisms for businesses but this does get tricky as the estimates have to be somewhat conservative and you have to be prepared for some other scenarios. For example, if you got the $200,000 then would you really never have to ask for more external equity financing in the future or is it quite likely that you'd want another infusion down the road? While you can mark it at $1,000,000 there will be questions about why that value that you'd have to answer and saying, ""Cause I like big round numbers,"" may not go over well. My suggestion is to consider what kind of sales will the company have over the next 5 years that you could work back to determine a current price. If you believe the company can have $5,000,000 in sales over the 5 years then it may make sense to place the current valuation of $1,000,000 on it. I wouldn't look too much into the money and time you've invested as that isn't likely to go over well with investors that just because you've put in what is worth $x, the business may or may not be worth that. The challenge is that without sales, it is quite difficult to get an idea of what is the company worth. If it makes billions, then it is worth a lot more than a company that never turns a profit. Another way to consider this is the question of what kind of economic output do you think you could do working here for the next 5 years? Could you do thousands of dollars of work, millions of dollars or just a few bucks? Consider how you want this to be seen where if you want some help look up episodes of TV shows like ""Dragon's Den"" or ""Shark Tank"" as these give valuations often as part of the pitch which is what you are doing." The value of a business without proven profits is really just a guess.  But to determine what % ownership the VC takes some measure must be used.  He is asking the OP to start the negotiations.  So you start high - higher than you will settle for. The value of the business should always be WAY more the $$ you have put into it ... because you have also invested your time (which has an opportunity cost) and assumed huge risk that you will never get those $$ back.   When you need the cash and only one person will give it to you, you are over a barrel.  You either take the terms they offer, or you let the business collapse.  So keep a show of strength and invent other funders. Or create a business plan showing that you can continue without their $$ (just at a smaller volume). "Putting a dollar amount on the valuation of a start up business is an art form that often has very little at all to do with any real numbers and more to do with your ""salesman"" abilities when talking with the VC. That said, there are a few starting points: First is past sales, the cost of those sales and a (hopefully) realistic growth curve.  However, you don't have that so this gets harder. Do you have any actual assets?  Machinery, computers, desks, patents, etc.  Things that you actually own.  If so, then add those in.  If this is a software start-up, ""code"" is an asset, but without sales it's incredibly hard to put a value on it.  The best I've come up with is ""How much would it cost for someone else to build it .. after they've seen yours"".  Yes, you may have spent 5,000 hours building something but could someone else duplicate it, or at least the major parts, in 200 hours after seeing a demo?  Use the lower number. If I was you, I'd look hard at my business plan.  Hopefully you were as honest as you can be when writing it (and that it is as researched as possible).  What is it going to take to get that first sale?  What do you actually need to get there? (hint: your logo on the side of a building is NOT a necessary expense.  Nor is really nice office space.)  Once you have that first sale, what is the second going to take?  Can you extrapolate out to 3 years?  How many key members are there?  How much is their contribution worth?  At what point will you be profitable?   Next is to look at risks.  You haven't done this before, that's huge - I'm assuming simply because you asked this question.  Another is competitors - hopefully they already exist because opening a new market is incredibly hard and expensive; on the flip side, hopefully there aren't that many because entering a crowded market is equally hard and expensive.  Note: each are possible, but take radically different approaches and sums of money - and $200k isn't going to cut it no matter what it is you are selling. That said, competition should be able to at least point you in the direction of a price point and estimate for how long sales take.  If any are publicly traded then you have additional info to help you set a valuation.  Are there any potential regulatory or legal issues? What happens if a key member leaves, dies or is otherwise no longer available?  Insurance only helps so much if the one guy that knows everything literally gets run over.  God help you if this person likes to go skydiving. I bring risks up because you will have to surmount them during this negotiation.  For example, asking for $200k with zero hard assets, while trying to sell software to government agencies assuming a 3 week sales cycle will have you laughed at for naivety.  Whereas asking for $10m in the same situation, with a team that has governmental sales experience would likely work. Another big question is exit strategy: do you intend to IPO or sell to a competitor or a business in a related category?  If selling, do you have evidence that the target company actually buys others, and if so, how did those deals work out?  What did they look for in order to buy?  Exit strategy is HUGE to a VC and they will want to make several multiples of their money back in a relatively short amount of time.  Can you realistically support that for how much you are asking for?  If not then going through an Angel group would be better.  They have similar questions, but very different expectations. The main thing is that no one knows what your business is worth because it is 100% unproven after 2 years and is therefore a huge financial risk.  If the money you are asking for is to complete product development then that risk factor just went up radically as you aren't even talking about sales.  If the money is purely for the sales channel, then it's likely not enough. However if you know what it's going to take to get that first sale and have at least an educated idea on how much it's going to cost to repeat that then you should have an idea for how much money you want.  From there you need to decide how much of the business it is worth to you to give up in order to get that money and, voila, you have a ""pre money valuation"". The real trick will be to convince the VC that you are right (which takes research and a rock solid presentation) and negotiating from there.  No matter what offer a small percentage of the business for the money you want and realize you'll likely give up much more than that. A few things you should know: usually by year 3 it's apparent if a start-up is going to work out or not.  You're in year 2 with no sales. That doesn't look good unless you are building a physical product, have a competent team with hard experience doing this, have patents (at least filed), a proven test product, and (hopefully) have a few pre-orders and just need cash to deliver.  Although in that situation, I'd probably tell you to ask your friends and family before talking to a VC.  Even kickstarter.com would be better.   $200k just isn't a lot of money and should be very easy to raise from Friends or Angels.  If you can't then that speaks volumes to an institutional VC.  A plus is having two or three people financially invested in the company; more than that is sometimes a problem while having only 1 is a red flag. If it's a web thing and you've been doing this for 2 years with zero sales and still need another $200k to complete it then I'd say you need to take a hard look at what you've built and take it to market right now.  If you can't do that, then I'd say it might be time to abandon this idea and move on as you'll likely have to give up 80%+ to get that $200k and most VCs I've run into wouldn't bother at that level.  Which begs the question: how did the conversation with the VC start?  Did you approach them or did they approach you?  If the latter, how did they even find out about you?  Do they actually know anything about you or is this a fishing expedition?  If the latter, then this is probably a complete waste of your time. The above is only a rough guide because at the end of the day something is only worth what someone else is willing to pay.  $200k in cash is a tiny sum for most VCs, so without more information I have no clue why one would be interested in you. I put a number of hard questions and statements in here.  I don't actually want you to answer me, those are for you to think about.  Also, none of this shouldn't be taken as a discouragement, rather it should shock you into a realistic viewpoint and, hopefully, help you understand how others are going to see your baby.   If the VC has done a bit of research and is actually interested in investing then they will bring up all the same things (and likely more) in order to convince you to give up a very large part of it.  The question you have to ask yourself is: is it worth it?  Sometimes it is, often it's not." "When the VC is asking what your Pre-Money Valuation is, he's asking what percentage of shares his $200,000 will buy. If you say your company is worth $800K, then after he puts the money in, it will be worth $1M, and he will own 20% of all shares – you'll still own the remainder. So when the VC is asking for a valuation, what he really wants to know is how much of your company he's going to own after he funds you.  Determining your pre-money valuation, then, is a question of negotiation: how much money will you need, how likely are you to require more money later (and thus dilute the VC's shares, or give up more of your own shares), how likely is your business to survive, and how much money will it make if it does survive? It isn't about the actual value of your business right now, as much as it is ""how much work has gone into this, and how successful can it be?"" The value is going to be a bit higher than you expect, because the work is already done and you can get to market faster than someone else who hasn't started yet. VCs are often looking for long shots – they'll invest in 10 companies, and expect 7 to fail, 2 to be barely-profitable, and the last one to make hilarious amounts of money. A VC doesn't necessarily want 51% of your company (you'll probably lose motivation if you're not in charge), but they'll want as much as they can get otherwise."
"The different things in each calculator are showing you a bunch of different things. In the ""Roth IRA calculator"", it is comparing what you would have in the end after contributing and withdrawing from a Roth IRA, with what you would have in the end with a taxable account (i.e. an investment outside of any IRAs). In the ""Traditional IRA calculator"", the ""IRA after taxes"" shows you what you would have in the end after contributing and withdrawing from a pre-tax Traditional IRA. The ""IRA before taxes"" simply shows the same amount before you pay the taxes on withdrawal, which is not a useful number. So if you want to compare Roth IRA vs. Traditional IRA, you want to compare the ""Roth IRA"" from the Roth IRA Calculator and the ""IRA after taxes"" from the Traditional IRA calculator, but there are some things you need to be aware of to make a fair comparison, because if you just plug in the same numbers you are going to get a very unfair comparison (it will look like Roth IRA is a lot ""better"" even though it's not). The Roth IRA contribution is after-tax, whereas a (pre-tax) Traditional IRA contribution is pre-tax, and an after-tax dollar is much more than a pre-tax dollar, so if you put in the same nominal contribution amount, you are actually contributing much ""more"" from your wallet in the Roth IRA case. To make a fair comparison, you would need to start with the same pre-tax amount, and put in a Roth IRA contribution amount that corresponds to the equivalent amount after taxes. So for example, a $5000 pre-tax amount with 25% taxes is equivalent to $5000 * 0.75 = $3750, so you would put in $5000 for Traditional IRA contribution vs. $3750 for Roth IRA contribution. Note that if you have the same flat tax rate at contribution and at withdrawal, (pre-tax) Traditional IRA and Roth IRA are exactly the same, and you can see this by putting in 25% for the ""Retirement tax rate"" in the Traditional IRA calculator (we already assumed 25% tax rate for Roth IRA when calculating the contribution). You will see that Traditional IRA would be better in a lower retirement tax rate (e.g. 15%), whereas Roth IRA would be higher in a higher retirement tax rate." Another way to decide would be to do a fair valuation of the company agreeable to both the partners. Lets assume when you started the company it was worth $10,000 and to acquire 75%, you must have put $7,500 worth of money and effort. Similarly, the other partner must have put $2,500 worth of time and money. Now say after 2 years, you both agree that company is worth $50,000. And say now the company needs $10,000 worth of investment. Whoever invests that money should get 20% (10k/50k) of the company. Or each $1,000 will buy 2% in the company. Post this investment the equity division would be  First investor (you) 75% of 80% = 60 % Second investor (your partner) 25% of 80% = 20% Third (new) investor = 20% Now, if you alone decide to put all the money you stake will be 60 + 20 = 80% and your partner will be reduced to 20%. If you guys want to maintain equity as it was (75-25), you need to put money in the same ratio ($7500 and $2500). If you do that- First investor 60% + 15% (for $7,500) = 75% Second investor 20% + 5% (for $2,500) = 25%. Please know for IP-centric company valuation is very subjective. But, do make an effort to do the valuation at every stage of the company so that you can put a number in terms of equity for each investment. "Check out Professor Damodaran's website: http://pages.stern.nyu.edu/~adamodar/ . Tons of good stuff there to get you started. If you want more depth, he's written what is widely considered the bible on the subject of valuation: ""Investment Valuation"". DCF is very well suited to stock analysis. One doesn't need to know, or forecast the future stock price to use it. In fact, it's the opposite. Business fundamentals are forecasted to estimate the sum total of future cash flows from the company, discounted back to the present. Divide that by shares outstanding, and you have the value of the stock. The key is to remember that DCF calculations are very sensitive to inputs. Be conservative in your estimates of future revenue growth, earnings margins, and capital investment. I usually develop three forecasts: pessimistic, neutral, optimistic. This delivers a range of value instead of a false-precision single number. This may seem odd: I find the DCF invaluable, but for the process, not so much the result. The input sensitivity requires careful work, and while a range of value is useful, the real benefit comes from being required to answer the questions to build the forecast. It provides a framework to analyze a business. You're just trying to properly fill in the boxes, estimate the unguessable. To do so, you pore through the financials. Skimming, reading with a purpose. In the end you come away with a fairly deep understanding of the business, how they make money, why they'll continue to make money, etc." If the child is a dependent the question is moot. It is accepted that the parent will pay for some, most, or all of the tuition. There is no tax issue for a current student. The payment of tuition helps them qualify as a dependent. There is no need to transfer the money to the child's account; it can be sent directly to the school. If the money is to be used in the future there are accounts such as 529s pre-paid accounts, and Coverdell savings accounts that can be used. All have pluses and minuses, all can impact taxes, and all can impact financial aid calculations. The value does change from 12.61% to 13.48%. The difference between re-investing cashflows at 14% vs 12% is not big enough to change the rounded value. Edit: The initial cashflow is discounted at t0, meaning it's already equal to its present value and the finance rate doesn't have an effect. It does impact future outgoing cashflows, as you've noted. What you are looking here is the cost of capital, because that is what you are effectively giving up in order to invest in those loans. In a discounted cash-flow, it would be the *i* in the denominator (1+*i*). For instance, instead of purchasing those loans you could have lent your money at the risk-free rate (not 100% true, but typical assumption), and therefore you are taking a slight risk in those loans for a higher return.  There are several ways to compute that number, the one most often used would be the rate if the bank were to lend that money. In this way, it would be the Fed Funds rate plus some additional risk premium. To figure this out, you need to know the price per share then vs the price per share now.  Google Finance will show you historical prices.  For GOOG, the closing price on January 5, 2015 was $513.87.  The price on December 31, 2015 was $758.88.  Return on Investment (ROI) is calculated with this formula: ROI = (Proceeds from Investment - Cost of Investment) / Cost of Investment Using this formula, your return on investment would be 47.7%.  Since the time period was one year, this number is already an annualized return.  If the time period was different than one year, you would normally convert it to an annualized rate of return in order to compare it to other investments. P/E can use various estimates in its calculation as one could speculate about future P/E rations and thus could determine a future valuation if one is prepared to say that the P/E should be X for a company. Course it is worth noting that if a company isn't generating positive earnings this can be a less than useful tool, e.g. Amazon in the 1990s lost money every quarter and thus would have had a N/A for a P/E. PEG would use P/E and earnings growth as a way to see if a stock is overvalued based on projected growth. If a company has a high P/E but has a high earnings growth rate then that may prove to be worth it. By using the growth rate, one can get a better idea of the context to that figure. Another way to gain context on P/E would be to look at industry averages that would often be found on Yahoo! Finance and other sites.