How do startup valuations work?

Building on the startup-oriented tools that Rick has published on his startup law website, we’ve created a simplified valuation framework for you. We’ve extracted this tool from financial models and valuations we’ve built for clients over the years.

The multiples have to be adjusted for a specific business and market, but the current values are very broad defaults and a reasonable starting point. There are specific spots in the sheet to add comparable companies. By calculating their values for P/E and P/Rev, you can add support to your use of particular multiples in the analysis – but only to the extent that the companies are actually comparable.

If you plug in the numbers from your financial model, it’ll give you a quick view of how those numbers affect the valuation of the company from a VC perspective. The ultimate valuation is also greatly dependent on a particular investor’s discount rate and expected return. The array of possible valuations shows how the discount rate affects ultimate valuation.

This valuation calculations sheet is the same one we build into financial models that we build for clients. What goes into this (before you get to this sheet) is everything required, from assumptions about market data, pricing, and operations to the business rules/logic that embody the relationships among these assumptions, to yield the main line items: revenue, COGS, gross margin, SG&A, and EBITDA.

What are your questions about small-company valuations? Do you put projections in place for your small business? If not, why not?