If you’re thinking about raising money for your business, chances are you’ve also been asking yourself how to figure out your valuation. But valuation calculations are an art, not a science. And doing it wrong can lead to disaster. If you set your valuation too high, you could price yourself out of your next round of funding. If you set your valuation too low, you might end up leaving money on the table.
Complicating things further, many businesses shouldn’t be valuing their company at all. During early stages, the stakes are too high, and the less data you have, the greater the chance that you’ll get it wrong.
But the good news is that you don’t need a valuation to open up your company to investment. Equity crowdfunding allows investors to take part in your business without necessitating a valuation.
Here are three ways to structure your equity crowdfunding offering and what they require in terms of valuation.
If you’re a cash-flow positive business, then revenue sharing might be a good option for you. Revenue sharing doesn’t require you to have a valuation when you launch your investment campaign. Rather, your investors are lending your business money in order to take part in your profits. They’re repaid bit by bit from your company’s future gross revenue, and a typical return is something like 1.5x their investment. The business agrees to pay investors a percentage of their revenue until they’ve paid a set sum. That fixed amount can be helpful when it comes to planning.
A huge benefit of revenue sharing is that your investors are incentivized to help your company succeed quickly, since it will mean a faster ROI for them. And for the business owners aren’t selling any equity or relinquishing any control in exchange for investment.
Might be a good choice for: A small business like a restaurant or a distillery that’s already cash-flow positive, but that may not have the two years of financials required to get a bank loan.
Convertible note/Crowd note
Like with revenue sharing, a convertible note lets you take in funding as short term debt. But instead of paying it back to your investors as part of your revenue, the debt converts to equity at a future date when you have more data and can do a more accurate valuation. Usually the conversion is triggered when you raise a new round of equity. Often there will be an interest rate attached to the convertible note, and typically the accumulated interest will also be converted to equity when the rest of the note converts. In order to make the offering more attractive to investors, you can provide incentives like a valuation discount (to reward the early risk taken on by investors) and a valuation cap (to ensure that if your company valuation increases materially in the future, the note will still convert to equity at favorable terms for the investor). In other words, these are ways to reward investors for taking on risk early.
If your company is young, there might not be enough to base a valuation on. And unlike with revenue sharing, you don’t need to already be cash-flow positive to set up a convertible note offering.
Might be a good choice for: An early-stage startup that wants to delay a discussion on valuation until a later date, when the company has firm metrics to evaluate or a lead investor to help set up the price of the round.
If your business has already raised previous rounds of funding or has been operating long enough to have adequate metrics, it might be easier for you to come up with an accurate valuation. You’d work with your lead investor or a professional who does valuations full-time and who understands your vertical. This sort of valuation is usually done by an institutional investor from an early round of funding. It’s rarely done by an angel investor, since they usually aren’t full-time investors who specialize in valuations.
You can then use this valuation as the basis for your equity crowdfunding campaign. Indiegogo will help you set your crowdfunding up for success and can give you additional insight into whether or not your valuation seems appropriate for your offering.
Might be a good choice for: More established businesses that have already raised a previous funding round and possess operational and financial metrics.
No matter what option you choose, your equity crowdfunding offering should be an attractive investment proposition with the potential for a good investor return. Even without a set valuation, investors are looking to take part in an offering that will be worth their while.
But finding investors through equity crowdfunding can help your company in ways that aren’t just financial. Equity crowdfunding is a great way to engage and grow a community around your business. You can foster a congregation of people that want to be part of your company’s journey, giving your business the chance to cultivate advocates as well as investors.
Interested in raising money for your business? Find out more about equity crowdfunding today.