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December 11, 2018

Series B And Later Stages Pre-Money Valuation - Approaches

Rick Norland

Rick Norland
Owner/Thorington Corporation

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a. Multiplier Methods

This approach is one of the more classical approaches.  It includes the use of multiples for Revenue, Earnings Before Interest, Depreciation, Amortization and Taxes (“EBITDA”), Net Earnings, Book Value, among others.  Clearly, the company must have a profitable operating history to justify the use of these approaches.  As well, care must be taken to ensure that public market multiples, while often relevant, must be adjusted to reflect the company’s private market status (often a 30% to 50% discount).  The resulting determination is the post-money valuation from which one would deduct the investment amount to determine the pre-money valuation.

b. Discounted Cash Flow

The discounted cash flow valuation approach is reasonably well known.  It is a financial calculation involving the concepts of recognizing each year’s future value and then, using an appropriate annual discount rate (say, 25% to 50%), sum each year’s “present value” to aggregate a value for the company.  The resulting determination is the post-money valuation from which one would deduct the investment amount to determine the pre-money valuation.

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