Startup Valuation Guide - Financials, Strategies & Methods

1. Introduction to the Fundraising Strategy
2. Financial Projections for Valuation purposes
3. Exit Strategy
4. Startup Valuation
5. VC & other seed stage valuation methods
STARTUP VALUATION - AGENDA

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INTRODUCTION TO THE FUNDRAISING STRATEGY
Most early-stage
investment decision
comes from INTEREST
(sector experience,
hype, referral, large
market, disruptive
business model, team,
synergies)
A good growth story is
confirmed by numbers
You can use the
numbers to sell your
story and gain trust
Value is a function of future profit, growth and risk. Your growth prospects &
investment suitability depends on your strategy
NarrativeNumbers
STRATEGY 1
STRATEGY 2

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Idea
Prototype/MVP
Market Entry/
Validation
Early Growth
Late growth
Financing milestones and possible financing sources  6 -18 months for each financing round
• Bootstrapping
• Grants
• Incubators
• Bootstrapping
• Business angels
• Friends & Family
• Accelerators
• Business angels, Super
angels, Angel co-
investment funds
• Crowdfunding
• Seed VCs
• Business angels/ Super
angels
• Early-stage VCs
• Family Offices
• Crowdinvesting (equity or
convertible debt)
• Impact funds
• VCs
• Crowdinvesting (equity or
convertible debt)
• Corporate investors/
Corporate VCs
• Other specialised funds
• Private Equity
• Bank Loan
• IPOs
Founders,
100%
Founders
70%Angel(s)
10%
ESOP
20%
Founders,
60%
Angel(s), 8%
ESOP, 17%
VC, 15%
250k-1m
1m+
50-250k
10-50k
Funding depends on
Stage
Sector
Location
Market trends
Competition
Strategy
Timing
Investor role

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Financing instruments
for startups: PROS CONS
 Common Equity
Higher residual income for founders in case
of exit, liquidation event
Voting rights; Expensive transaction costs
 Preferred Equity
Less control of shareholder, depending on
term sheet clauses
Additional rights for conversion, profit split,
exit and liquidation, Transaction costs
 Convertible Loan
Lower transaction costs; No valuation
needed; No investor voting rights
High risk of dilution; Converted into stock
at a future round with a valuation cap
 Loan No equity given to investor
Repayment schedule; Hard to be granted
one without credit history; Insolvency risk
 Revenue-based Financing No equity or fixed payment schedule
% of revenue paid to investor whether the
company is profitable or not

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Seed funding assumptions
Post-money
valuation
$1m 20%
Investment
needed $1m
Shares %
demanded by
investor 20%
$5m
Negotiations
:
Pre-money valuation = Post-money
valuation – Investment
Equity stakes are based on the
post-money valuation
(they own a stake in the company
after financing)

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Do you have an exit strategy?
Business
Angel
Highly valued
company, synergies to
be created by
acquiring other
companies
VC
Strategic
Exit
No Exit
(or only minority
shares)
IPO
Synergies can be
created by being taken
over by a corporate
investor
Company can be
sufficiently profitable
on its own

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The expected total return on investment can be:
For some large and risky opportunities they may look for much
higher returns (as the set returns above). In reality, average
return on investment are much more modest per year, around
15-25% - in total for seed investors it could revolve around 2-
4x or less rather than 15-20x. Higher returns are sought to
account for the portion of startup investments that will fail.
9
Return on Investment
15-20x for
seed investors
7-8x for
Series A +
3-5x for
advanced
funding rounds
ROI = (Cash Flows + Exit) – Investment x Investor stake%
Investment
Mock extracted valuation
Funds needed 500,000 EUR
Investor stake 10% of company's equity
Post-money valuation 5,000,000 EUR
Pre-money valuation 4,500,000 EUR
Return on Investment expected 8
Total cash flows the startup should raise to meet return expectations
40,000,000

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 The company/product will be useful or profitable at some point in the future, but we don‘t
know exactly when or with what revenue model
 They have already developed a business model or brand recognition that cannot easily be
replicated
 There are countless different strategies that can be followed in the future
 They have a very large potential market
 The focus is on achieving critical mass and eliminate competition
 The sector is currently very popular and growing
 Bring a new, disruptive and scalable business model or technology to the market
 They can become a vehicle for future acquisitions (through an IPO)
 They have received the backing of trusted investors
 The extrapolated valuations do not account for the superior contractual rights of VCs
10
How can we explain the unicorn valuations?
Should I sell my
company as a
unicorn?
It depends on the
amount of
funding you are
looking for.
Business angels
may prefer
investing in
businesses that
bring short-term
cash flows.

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CUSTOMER SEGMENT X 2019 2020 2021 2022 2023
Total addressable market (TAM) 1,000,000 1,000,000 1,014,889 1,030,000 1,045,336 1,060,900
Market CAGR 3%
Serviceable Addressable Market (SAM) 10% 100,000 101,489 103,000 104,534 106,090
1.0% 5.000% 15.000% 20.000% 25%
Serviceable Obtainable Market (SOM) 1,000 5,074 15,450 20,907 26,523
New customers 1,000 4,074 10,376 5,457 5,616
Retention rate of period 95%
Active customers 1,000 5,024 15,196 20,134 25,477
Customer Acquisition Cost (CAC) $ 10 10,000$ 40,744$ 103,756$ 54,567$ 56,158$
12
IDENTIFYING THE MARKET
Customers & Marketing
Total Available Market (TAM)
Serviceable Available
Market (SAM)
Serviceable
Obtainable
Market (SOM)

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 Sale of products/ services
 Subscription fees
 Licence fees
 Transaction fees
 Advertising
13
THE FINANCIAL PLAN
Finding & Calculating your Revenue model

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Sale of products/ services
 Do you provide repeat (+ retention) or one-off
services/ products?
 Unit price of each main product
 % of customers buying each product
 Number of units bought by one customer per year
Licence Fees
 Does a licence fee contract support other revenue
streams?
 Average wholesale price of licensee
 Licence fee % (e.g. 5%)
 Number of units bought by one customer per year
14
THE FINANCIAL PLAN
The assumptions needed to calculate the revenue model

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Subscription fees
 Conversion rate (% of paying users)
 Does the conversion rate increase over time for any
reason?
 Inflation
 Types of subscriptions
 Monthly subscription fee
 How many of the paying users pick each
subscription %
 Average length of subscription in months
 Retention
15
THE FINANCIAL PLAN
The assumptions needed to calculate the revenue model

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THE FINANCIAL PLAN
Transaction Fees and Advertising
Transaction Fees
 Average transaction price of users
 Transaction fee % by platform (e.g.10-20%)
 Share of active users who place transactions
 Does the share of active users stay the same?
 Number of transactions per active user per month
 Retention
Advertising fees
 Monthly featured content/ sponsorship: Price and
% of users selecting this
 Pay per view: Price and % of users/ n° third parties
selecting this
 Pay per Click/Action: Price and % of users/ n° third
parties selecting this, Click-Through Rate
 Retention

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THE FINANCIAL PLAN
Calculating cash outflows
 Materials costs in % of revenue, or better on a per unit basis (taking into account inventory orders, timing of each
payment, and increasing costs)
 Other direct sales costs (e.g. referral fees, any commission, freight and delivery costs, transaction fees)
 Count the employees needed for each function based on capacity – Project the number of employees on a
Revenue per employee or Customers per employee basis and compare them with similar industry players: you will
be able to determine if your projections are realistic
 Marketing & Sales costs (related to customers acquired)
 Recurring product or service costs, set-up costs, expansion costs (R&D, operations)
 Hosting and web expenses (if you have a platform, based on users)
 Administration expenses (rent, travel, consulting, general costs)
 Investments & depreciation (hardware, real estate, platform)
 Interest on debt (if you have any loan)
 Tax (based on Earnings before Taxes  Take into account any tax breaks you have and timing of payment)

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+ Cash receipts from customers
- Cash paid for inventory
- Cash paid for other direct costs and operating expenses
- Tax Paid
OPERATING CASH FLOW
- Investments
INVESTMENT CASH FLOW
- Debt/ Interest Payments
CASH FLOW (TO EQUITY)
+ Equity investment received and dividends paid
CHANGE IN CASH AND CASH EQUIVALENTS
18
THE FINANCIAL PLAN
Using the direct Cash Flow approach to calculate your budget
• Revenue is the only measure usable to
calculate an exit value at this stage (later
EBITDA, EBIT and profit become more
important)
• Profit is not cash flows: you need to know
when your payments are due (especially if you
have inventory or capex)
• Calculating monthly cash flows allows you to
understand how much funding you need and if
you need multiple financing rounds
• The Cash flow to Equity will determine your
equity financing needs

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Investments so far Use of funds
0%
Salaries & Outsourcing - 310,115 22%
Marketing & Advertising costs - 966,119 68%
Set-up legal, marketing launch and product development costs - 100,000 7%
Hosting expenses - 6,118 0%
Rent & Miscellaneous administration expenses - 40,750 3%
Investments - 2,000 0%
Tax 0%
0%
0%
0%
1,425,102- Maximum investment
Revenue 438,990
Direct sales costs - 188,685
250,306
1,174,796- Minimum investment
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THE FINANCIAL PLAN
Funds raised
 Investors prefer investing in product
development and in an efficient sales
strategy or expansion costs
 The amount of funds you ask for should
cover all operating costs and investment
for the period chosen
 The minimum investment includes your
best case scenario, in which you realise
the sales as planned in your financial
projections
Important information to
communicate:
- Annual Run Rate (annualised
revenue ARR)
- Cash Burn Rate
- Time Before Cash Runs Out

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 Additional sales channels  additional profit per user per year
 Technology integrated in company  total technology savings per year
 Know-how integrated in company  new product development and sales
 Market leadership (eliminate the threat of competition)  additional users, retaining current users who
require constant product development, and profit per user per year
 Consolidate branding and company‘ market position  additional users, retention of users
 Entering new country/ region  new users, sales channels and cost savings
 Centralisation of activities and economies of scales (e.g. marketing, admin)  total cost savings per
year
 Control over supply channels  cost savings
 Etc...
21
EXIT STRATEGY AND VALUE
Why do corporate/strategic investors acquire other companies?

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ESTABLISH COMPARABILITY:
1. Similar revenue generation, business model and risk
2. Preferably do not include Unicorns
3. If possible: use Exit Multiples rather than Early-stage Funding Multiples or Multiples of stock listed companies
4. If possible: similar market size, region, deal mostly paid in cash, sold at similar stage
22
EXIT STRATEGY AND VALUE
How to select multiples
EV/Revenue multiple
EV/EBITDA multiple
EV/EBIT multiple
Equity/ Net
Profit
Also EV/ Number of Users
EV/ Sales outlets
EV/ Number of products
EV/ Years of operation
Other sector-specific
figure
Revenue (during your Exit year)
x
EV/ Revenue multiple
=
Future Exit Value

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EXIT VALUE AND STRATEGY
Research exits on Crunchbase, Tech Crunch, Venture Beat, etc.
Research revenue, users (and
other figures) from press
releases
! Sector popularity (e.g. number of companies recently funded
or sold) increases exit multiples  You can how examples to
potential investors (even if the valuation, revenue or user
figures are not available)

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 If you find relevant data, it‘s best to use only acquisitions of companies that were sold at the same time when you
would ideally like to sell yours (e.g. after 5 years of operations)
24
Calculate your exit value
EUR only for platforms
Company
name
Country Funding/ Stage/ Exit/ Market
listed
Deal amount Shares sold
%
Enterprise Value Users at time of
investment (or
now is stock
listed)
Revenue at
time of
investment
EV/ User (or
monthly
unique
visitors)
EV/ Revenue
LinkedIn US
Acquired by Microsoft in 2016
(100% cash)
23,842,000,000 100% 21,931,000,000 400,000,000 2,720,900,000 54.83 8.1
Whatsapp US
Acquired by Facebook in 2015
(<25% in cash)
20,020,000,000 100% 20,020,000,000 400,000,000 9,282,000 50.05 2156.9
Twitch US Acquired by Amazon in 2014 882,700,000 100% 882,700,000 55,000,000 16.05
Airbnb US 2015 Funding Series E 1,365,000,000 6% 23,205,000,000 60,000,000 801,000,000 386.75 29.0
Yuan Tiku China 2015 Funding Series D 54,600,000 17% 327,534,493 13,000,000 25.19
Handy US 2015 Funding Seriec C 44,500,000 10% 445,000,000 71,200,000 6.3
Yelp US Stock market listed since 2012 1,728,090,000 145,000,000 536,736,200 11.92 3.2
Angie's List US Stock market listed since 2011 450,767,200 3,200,000 79,170,000 140.86 5.7
Median 25.19 5.69
Sources: Crunchbase, Bloomberg, etc. ADJUST MEDIAN
 Relevance of multiples: Exits > Funding or
stock listed companies
 When using Exits: deals with greater portion
of cash than stock are more relevant
 When using Funding: Late stage funding
multiples make more sense than early stage
funding multiples
 When using stock listed companies: as a
startup, recently listed companies have
more relevant multiples than mature
companies
 For mature companies with significant debt,
the calculation will be slightly different

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 Why is the company interesting for an acquisition?
 Decide when the best time to sell your company is (usually between 5-10
years) – analyzing acquisitions in the sector gives you a good indication
 Do the companies have a similar revenue model to yours? If not, the
multiples, especially a user-base multiple, would not make sense
 You didn't find good multiples? Use between 2-6 x EV/Revenue for startups:
 the more popular the sector, the higher the multiples
 the more numerous the types of companies that may be interested in
acquiring you, the higher the multiple
 Calculate your exit value based on your figures in the chosen year (e.g.
Revenue year 7 x Revenue multiple = Terminal value Year 7) – This is not your
valuation because it is a future value, to be discounted to the present
 It would be ideal if values extracted from different multiples come very close
(unlike the example shown)
25
Calculate your exit value
EV/ User EV/ Revenue
25.19 5.69
Customers Revenue
2023 461,407 19,241,698
11,625,121 109,555,721
EXIT VALUE EUR60,590,421

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DISCOUNTING AND DCF VALUATION
You value depends on cash flows: Why your company risk changes your value
The second step is the Return of
Investment – You need to sell
yourself as a profitable investment
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Value (1.42) (0.28) 2.19 6.47 10.60 17.60 30.70 39.32
(10.00)
-
10.00
20.00
30.00
40.00
50.00
COMPANY VALUE AT DIFFERENT STAGES €M
-2 -4 -1
2 5 10 12 14
-20
0
20
CASH FLOWS €M
Idea
Prototype
Minimum
Viable
Product
Market
Entry
Expansion
Cash Flow/ (1+ Discount Rate) ^n°Year
90%
60%
45% 35% 30% 25% 20% 18%
0%
25%
50%
75%
100% DISCOUNT RATE %
Different risk for different strategies and
stages of the business because of the risk of
failure and uncertain strategy.
These risks should ideally be incorporated in
your cash flows – but showing a completely
realistic financial plan would make it difficult
to get funded!
Investors may not benefit from your cash
flows directly, so typically discounting only the
exit value is the most common approach for
startups. You can also just assign a specific
risk to your future exit value.

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 No official discounting techniques for startups – the discount rate can represent the expected return or perceived
risk of your cash flows (to equity). Different investors may be more susceptible to some risks than others
 For startups it takes into account your cumulated probability of failure related to your stage: therefore for startups
use one unique discount rate for each funding round:
28
How can your risks be quantified?
75-90% 70-80% 60-75% 50-65% 40-55% 35-50% 30-45% 25-35%
IDEA
DEVELOPME
NT
PROTOTYPE/
MVP
MARKET
VALIDATION
MARKET
ROLL-OUT
GROWTH EXPANSION
LATE
GROWTH
01.08.2016 01.03.2017 30.01.2018 01.03.2019
1,270,208 10,844,788
BASIC INDUSTRY RISK
FINANCIAL DISTRESS RISK
BUSINESS & COMPETITION
RISK
GROWTH RISK
STARTUP TEAM RISK
STARTUP STRATEGY RISK
STAGE & FUNDRAISING RISK

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How to calculate your terminal value
Business
Angel
Highly valued
company, synergies to
be created by
acquiring other
companies
VC
Strategic
Exit
No Exit
(or only minority
shares)
IPO
Synergies can be
created by being taken
over by a corporate
investor (example Year
5)
Company can be
sufficiently profitable
on its own (example
Year 7, or when a
sustainable growth is
reached)
Long-term Cash Flow YearX
x (1+ growth%)
: (Discount rate –growth%)
= TERMINAL VALUE CASH FLOW
: (1+ Discount rate) ^ YearX
= TERMINALVALUE
EXAMPLE TERMINAL VALUE
FUTURE EXIT VALUE
: (1+ Discount rate) ^ n°Year
= TERMINALVALUE

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Understand how important your exit value may be for your valuation
Scope of valuation
Revenue Cash Flows Discount DCF
2016 - 20,956- 69% - 20,956
2017 32,518 188,940- - 111,568
2018 169,647 656,682- - 228,973
2019 846,817 789,639- - 162,582
2020 2,853,466 12,077- - 1,468
2021 7,010,168 1,271,513 91,284
2022 16,034,748 9,023,662 382,535
Exit 60,590,421 2,568,578
2,516,850
Company name Country
EV/ User (or monthly
unique visitors)
EV/ Revenue
LinkedIn US 54.83 8.06
Twitch US 16.05 -
Yuan Tiku China 25.19 -
Handy US - 6.25
Yelp US 11.92 3.22
Angie's List US 140.86 5.69
Median 25.19 5.69
2023 Users/ Revenues 461,407 19,241,698
Range of exit values 11,625,121 109,555,721
Average: 60,590,421
Reasons for company acquisition
New sales channels and strengthening of branding
within the target group
Business Angel funding
Funding/ Stage/ Exit/ Market
listed
Acquired by Microsoft in 2016
Stock market listed since
Acquired by Amazon in 2014
2015 Funding Series D
2015 Funding Seriec C
Stock market listed since
-500,000
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
2016
2017
2018
2019
2020
2021
2022
ExitDiscounted Cash Flows

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Why do you think that investors expect an exit?
1. Because the exit value is typically higher than the cash
flows that the company could earn independently
2. Because the investor does not have many other
opportunities to sell his/her equity stake without an exit
3. Because the cash inflow from selling the company
comes sooner than future long-term cash flows
31
?
-2 -4 -1
2 5 10 12 14
-20
0
20
CASH FLOWS €M
90%
60%
45% 35% 30% 25% 20% 18%
0%
25%
50%
75%
100% DISCOUNT RATE %

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Exit Value 60.59 EUR
Anticipated ROI 15
Post-money valuation Mil. 4.04
Investment 0.25
Pre-money valuation m 3.79
 Cash Flows for startups in the first years are not very relevant – if you‘re raising funds from VCs you‘ll probably be
making a loss for two/three additional years  The investor’s return mostly comes from the potential exit
 In advanced stages, the terminal value can also be calculated using an EBITDA or Net profit multiple
 VCs will calculate this value independently, but knowing the reasons why your company may be valuable to
acquirers will be an advantage
 You can estimate the Anticipated Return on Investment, but you will not know the expected return of each
investor, this may depend on their expected portfolio return and stage of the company
 Additionally the Chicago method calculates your discounted cash flows and exit value with different scenarios
(worst, medium, and best case scenario) and weights the results according to the probability of each. The worst
case scenario would usually hold 0 value.
33
SEED STAGE AND VENTURE CAPITAL VALUATION METHODS
Your exit value is very important to VCs VENTURE CAPITAL METHOD
(This is a simplified method, typically the ROI
is calculated based on exit year as well and
with additional probabilities)
The result is a post-money valuation, because
the projected cash flows include the
investment amount, just like the DCF method
In this case, the exit value is only the best case
scenario, so we used a high ROI.

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VC Valuation Practices
 Scenario analysis will focus on different: Financial & Exit Multiples (Future Exit Value), Time to Exit, Dilution,
Probabilities
 The return expectations on most deals ranges between 15-25% per year
The multiplier used earlier is the same as using the
expected return on investment and time to exit
1/(1+25%)^8 = 5.9

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0.89 USD to EUR
3.8
70%
Estimated comparable
value of local startups
EUR 2.37
Estimate current valuation
of pre-revenue pre-money
valuations Mil
USD Mil. - Median current pre-revenue pre-
money valuations in USA (Halo Report, adjusted)
 Calculate the pre-revenue pre-money startup valuations in your area, then attribute a value between -2 (for negative
characteristics) and +2 (for positive characteristics or absence of risk) for each of these risks. Then you sum up the
points and for every point you add or subtract $250.000 (preferably adjusted to local valuation level and currency).
35
Risk Factor Summation Method
Resources:
www.angelcapitalassociation.org
www.angelresourceinstitute.org
angel.co/valuations (all valuations not just pre-money)

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 What if your sector is valued differently from the average startups, or you need higher investments?  Estimate the
average pre-revenue pre-money valuation in your sector:
36
Risk Factor Summation Method (proposed approach)
Fintech Funding € Assumed stake given (no information) Post-money Pre-money
ZipZap US 2014 Funding Seed 979,000 10% 9,790,000 8,811,000
Technology platform
for moving money
around the world
Bonafide US 2015 Funding Seed 756,500 10% 7,565,000 6,808,500
Enables reputation,
trust and fraud
prevention for Bitcoin
Regalii US 2016 Funding Seed 3,560,000 10% 35,600,000 32,040,000
International mobile
payments platform
Median Seed 9,790,000 8,811,000 EUR

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Characteristic -2 to +2 160,000
Management 1 160,000
Stage of the business -1 - 160,000
Legislation/Political risk 1 160,000
Manufacturing risk 2 320,000
Sales and marketing risk -2 - 320,000
Funding/capital raising risk -1 - 160,000
Competition risk -1 - 160,000
Technology risk 1 160,000
Litigation risk 0 -
International risk 1 160,000
Reputation risk -1 - 160,000
Potential lucrative exit 1 160,000
TOTAL - FACTOR
ADJUSTMENT
160,000
Median pre-revenue pre-money valuations 2.37
+ Factor adjustment 0.16
Adjusted pre-money valuation 2.53
+ Investment 0.25
Post-money valuation Mil. 2.78
Is there a risk that the quality of technology (e.g. for platforms) can affect the business's
Could clients or competitors sue you?
Does the strategy include a risky international expansion?
Does your reputation/ branding have a strong effect on sales?
Could many buyers be interested in acquiring your company in the future?
How strong is the competition at home and abroad?
Comment
Committed high investment already, Exit>industry>entrepreneurship experience, Over 6 months
funds left, Key skills with founders' team or key employees
Stage risk (negative before market entry)
Change in laws that can affect the business
Manufacturing risk and need for working capital for production
Is your success dependent on a successful marketing strategy? Did you validate your idea with
a sample customer base? Do you have partnerships?
Does your company need future rounds of financing to be successful?
37
 Other similar methods: Scorecard method (mostly suitable
to business angels), Dave Berkus Method, Development
Stage Valuation Approach (not flexible towards market
trends)

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Scorecard Valuation Method
Comparison factor Range max Target Company Factor
Strength of the
Management Team
30% 100% 0.30
Size of the Opportunity 25% 100% 0.25
Product/ Technology 15% 100% 0.15
Competitive Environment 10% 100% 0.10
Marketing/ Sales Channels/
Partnerships
10% 100% 0.10
Need for additional
investment
5% 100% 0.05
Other 5% 100% 0.05
SUM 1.00
Median pre-revenue pre-money valuations 2.37
X Factor adjustment 1.00
Adjusted valuation 2.37
+ Investment 0.25
Post-money valuation Mil. 2.62 EUR
This methods also starts with the
calculation of pre-revenue pre-
money start-up valuations in your
area

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Communicate your return expectations and findings
Average two methods of your
choice, ensure that they have
similar results with the DCF
method (if chosen).
You may choose to adjust the
valuation for expertise offered,
but you should check if the
expertise offered by the
investor is specifically useful
to you. Also a leading
business angel may be able to
find others to co-invest with
him/her.
DCF + Exit
Average Post-Money Valuation
Investment sought
15.1% of current Seed stage value
Total Return on Investment
Pre-Money valuation 1,741,415.15
2,835,984.85
2,053,096.33
2,050,000.00
308,584.85
39.63
Average post-money valuation adjusted
1,270,207.81

WWW.VALITHEA.COM 40
The process
Approach of investor Expression of interest Submission of documents
Update investor on progress Investor wants to invest NDA
Waiting....
Negotiations Term Sheet Due Diligence
Practical talks start
Investment Agreement
Shareholder Agreement
Signing
Registration of Capital Increase
Closing (Transfer of funds)
If due diligence is positive...

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Be aware of the fact that most term sheets include these clauses, but ensure that they do not put you at a great
disadvantage. Typically VC term sheets will be stricter than the ones presented by some business angels:
 VALUATION: Pre-money/ Post-money/ Fully diluted
 FUNDING MILESTONES: Tranches may carry different valuation every time a tranche is paid and have conditions
based on the business plan
 SHARES: Ordinary or preferred shares, conversion rights
 EXIT or SHARE TRANSFER: liquidation preference 2x, tag-along/ drag-along/ forced sale, special investors rights,
IPO clauses; pre-emptive rights, lock-up, right of first refusal/ right of first offer, call options/ put options,
clawback shares, incentive options, ratchet clauses
 FUTURE FINANCING dilution and financing rounds rules
 GOVERNANCE: board composition, veto and information rights
 PERSONAL LIABILITY and indemnification
 COVENANTS: IP assignment and non-compete, non-solicitation clauses
 TERM SHEET: Exclusivity, expenses, timing and drafting responsibilities, legal nature and confidentiality
41
The Term Sheet is a non-binding offer, take great care in understanding the restrictions

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Events and clauses that dilute shareholdings:
 Vesting of ESOP (employee stock ownership plan)
 Investing of new shareholders and capital increase (how
shares dilute for each shareholder is detailed in the term
sheet)
 Maturity or options of convertible debt
 Liquidity preference of VCs or other investors in case of
an exit
 Other clauses e.g. exit value under expected amount
You may own a much smaller stake of your company at exit,
but it could be a small stake of a large company. However,
ensure that this may be enough in terms of cash for all the
work that you may put in over the years.
The valuation should be adjusted for dilution based on your
expected future fundraising.
42
Dilution of early-stage investors

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 Price of Last Investment
 Options
 Convertible Debt
 LP/ GP Fund Cost
 You don‘t need a high valuation
43
Additional Considerations

INVESTMENT READINESS CHECKLIST
✐ Active customer base and large market
✐ First-mover in the market/ Disruptive business model
✐ Interest from different investors/ Popular sector
✐ IP or proven technology
✐ Experienced and responsible team
✐ Focused strategy, but with a variety of future expansion possibilities
✐ Company in the future can be easy to integrate in a potential acquirer and can become
independent from its founders

CONTACT:
Valithea OÜ
W: www.valithea.com
E: olivia@valithea.com

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