Startup valuation: what’s it really worth?

The valuation of the business

The valuation of a company is not a simple thing to do. It all depends on the price a potential investor wants to pay. It is obvious that investors want to come on board for as little money as possible while on the other hand starters hope for a decent valuation of their company.

Both parties will benefit from avoiding excesses and working towards a mutual agreement. Although each start-up is different, there are a few rules of thumb, which have been applied successfully by SO Kwadraat in the past years in achieving consensus between candidate investors and starting entrepreneurs.

A few classical valuation rules:

• Take the average turnover of the next two years.

• Or take six times the average profit of the next two years.

• Or take a value between the previous two.

"If you have something marketable, start selling it. Every euro you raise from investors comes at the cost of giving away part of your company. That’s why the advice is clear: make sure your company’s value is as high as possible before seeking funding: like having a working prototype ready to go." Koen Vervaeke, founder and CEO of Magcam

The valuation of the contribution of the starters

When attracting external capital, the valuation of the starter's team plays an important role. Patents can be introduced in the start-up. As mentioned earlier, we rather recommend an exclusive license on patents with a purchase option instead of patents in exchange for shares.

When the starters are experts in their domain and they have worked for years in a specific field, they add value to the start-up. In other words: they cannot very easily be replaced. In fact, without them the start-up would be impossible and the developed technology worthless.

As a rule of thumb you can valuate a high-tech starter team by attributing 250,000 euro per head. A three-person start-up is therefore worth 750.000 euros. This evaluation is indeed a valuation on paper. When bringing in 250,000 euros of external capital, the starter's team has 75 percent of the shares. Without such a valuation it is very difficult for starters to acquire a significant participation in their business.

The investor has a strong interest in a fair valuation of the management team. As mentioned before the key to success for young starters is that the company is mostly in the hands of the founders or the management team that is actively involved in running the business. This team will be working day after day to make the company successful and to foster its growth. They will therefore make a lot of sacrifices. When the founders do not occupy an executive function, the chances of growth and success are reduced.

"I’m so glad we listened to SO Kwadraat’s advice on dividing initial shares. Without their guidance, we would have gone for a simple equal split. Our coach strongly opposed that. Those were tough discussions, but his constructive approach and outside perspective as a coach made all the difference.” Vanessa Vankerckhoven, co-founder and CEO of Idevax

The valuation of intellectual property

The discussion about the transfer of intellectual property {IP) is a matter of a negotiation between the parties. A fair agreement is the best guarantee of success for the young company. The latter is both in the interests of the candidate investor and the starter himself.

At each transfer of IP it is important to make the cost a function of the quality of the transferred IP (in the form of patents). As a starter you will want to purchase exclusive IP rights in the most favourable way. The best way to do this is by negotiating an exclusive license agreement with pre-emption. If the protected product or service sells well, the value of the patent as well as the return will be significant for the inventors. If on the other hand the patented technology is worthless and not fit to sell, you will not pay anything.

The most important conditions for an exclusive license agreement are:

• The price of the license fee is usually set at between 1 and 3 percent of the turnover for the related product (and not necessarily on the total turnover of the company).

• The term of the agreement is equal to the period that the patent still gives protection.

• The owner is responsible for the maintenance of the patent.

• In case of purchase of the patent, often a price is between 5 and 15 percent of the turnover over the last few months on the product.

You can have this contract drafted or checked by a lawyer.

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