The valuation of a company is the price you are willing to sell your company shares to an investor or group of investors for. It is the perceived value at a certain time, hence named valuation, of the company from a seller to a prospective buyer.
The valuation is generally laid out and defined in a cap table by which the funding trajectory towards the upside is defined (in advance when derived from a multi-year operating plan) in both pre-money and post-money valuations. As an entrepreneur, it is important to realize one must find investors to align with the upside first before a discussion on intermediate valuations should take place. If you can’t agree on the pursuit of upside, move on to another investor who does align.
The assessment of valuations has a direct effect on the equity stake of the founders (and investors) in the company and, therefore, implicitly defines the voting rights and wherewithal to ever reach upside. Seldom does the trajectory identified ahead of time match reality, so be sure the investors you sell shares to have the wherewithal to support multiple rounds.
To make a long story short, the pre-money valuation of a company valued at $1 million can be less, equal, or dramatically more dependent on how you executed against your trajectory towards the upside. If you blow the doors off operational excellence, you may deserve and be able to sell a multiple of the post-money valuation of the previous round (by increasing your price per share), if you didn’t, your post-money valuation may be equal to the pre-money of the next round. Less stellar performance, but still feasible upside may yield a down-round.
But be careful with valuing a company too aggressively because it forces you as a founder to execute on your company with remarkable excellence, and if not, you are bound to take a hit on ownership and control. In the end, what matters is that the decrease in founder equity yields a disproportionate increase in valuation (without a loss of majority control). A valuation that is not a greater-fool lie to the public, as the last in the chain of greater-fools finding out the hard way (post-IPO) valuation, does not live up to value. A not uncommon occurrence.
So, I urge you to do right by the public first (for whom you aim to deliver societal value) with a sincere projection of upside and renewable socioeconomic value, then secondly, do right by your investors with an accurate depiction of feasible operational risk and valuation milestones, which will then last-but-not-least leave plenty of room for you to value the company yielding a sizable reward for all your hard work.
Keep in mind, sincerely change the world for the better (or don’t bother), and you will find your personal valuation to become renewable, much more important and satisfying than becoming a one-hit-wonder that leaves you mentally miserable for the rest of your life.
