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December 11, 2018

Seed Stage Pre-Money Valuation - Approaches

Rick Norland

Rick Norland
Owner/Thorington Corporation

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Berkus Method

Dave Berkus has been an active Angel investor since 1993.  Recognizing the necessity for simplicity at the Seed Stage, he developed a pre-money valuation methodology that focuses on the primary drivers for value increases between the Seed Stage and the Series A Stage.  The approach, highlighted in Table 1, provides a valuation boundary for a subjective assessment in a few key areas.

Table 1: Berkus Valuation Method
Value Driver                                      Add to Company’s value
Sound idea                                        US$1 million
Prototype                                          US$1 million
Quality management team                  US$1 million to US$2 million
Quality board                                     US$1 million
Product rollout or sales                       US$1 million

Total potential value                           US$1 million to US$6 million

Source: Dave Berkus, reported by Amis/Stevenson, Winning Angels

Rule of “Development Milestone”

The more diligent investors will attempt to provide more “quantification” to their assessment of pre-money value.  As one such attempt, some Seed Stage investors estimate the amount of cash required to achieve a major development milestone and, often without regard to how much that is, equate that amount to 50% to 60% of the company (post-money, full dilution). 

Rule of “Thirds”

The Rule of “Thirds” simply implies that 1/3 of a new company’s equity should go to the Founders, 1/3 to management (i.e. an Option Pool), and 1/3 to the Seed Stage investors.  This methodology is used most often as a “sanity check” to other valuation methodologies.

Comments? You can contact me directly via my AdvisoryCloud profile.

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