$2 million valuation.
In a pre-revenue, idea-stage, company, this is roughly in the ballpark of what many investors may use. More specifically, this may refer to startups in the early stages of operations, perhaps with an MVP and some traction with customer validation (good feedback from potential customers, +/- contracts signed).
At this stage, it is very difficult to project out future revenues/cash flows. However, a good founder will have carefully mapped out their run rate over the next 6 months, 1 year, etc. A sum of expected costs should be the basis for the “ask” amount.
Say, for the next 12 months run rate, you have the following breakdown (roughly similar to what MedCyclops was anticipating when we were raising a seed round):
- 4 employees (2 engineers, 2 salespeople): $100K/year each or $400K total
- Founders: $150K total
- R&D (equipment, clinical trials, etc): $200K
- Regulatory fees (FDA, etc): $100K
- Other indirect costs: $150-200K
Say you’re able to bootstrap half the costs, and ask for $500K for the seed round to cover the next year’s expenses. With an equity raise, for your pre-money valuation of $2 million, you’d be giving up 25% of the company for a cash infusion. The other (possibly better, and commonly done) option is to ask for for a convertible debt in the amount of $500K. This would be converted to equity later, at your next fundraising round. Say 1 year later, you’ve finished several clinical trials and have contracts with customers lined up, and maybe have an $1 million ARR. At this point, you raise a seed/A round at a $20 million valuation. The convertible note now represents a 2.5% stake in the company.