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Valuation the easy way

blog.experimenthouse.com

7 pointsdrewcrawford9 comments

Very good post. But I was wondering how you value your ideas up front? Also, any scope for going back and revaluing it (e.g. if it brought in much more revenue than expected, with little work required i.e. little dilution) during your regular valuation meetings?

I'd be interested to know, a year down the line, whether these frequent meetings ultimately were a productive and motivational use of your time? On reading your article, it certainly seems like a good way to do things, but it'd be nice to have it run its course and then view it in retrospect!

As far as valuing ideas up front, we plotted them at discrete points in the creative process. There was one particular "critical" meeting we used early on as a landmark, because a lot of our product ideas came out that day. We would ask ourselves "what % of our value was idea X before that meeting?" Then we would extrapolate it to a year out, to see if the slope of decay looked right to us. With some linear interpolation, we came up with a number along its decay line that represented its value today.

Revaluing things retrospectively isn't something that we've talked about yet but it's certainly a space for further exploration. I think our hope is that there will be enough time delay between someone proposing an idea and its valuation that we'll have some actual customer data or feedback that we can evaluate.

As to the long-term viability of our system, only time will tell :-)

FWIW, PG seems to believe that there was a correlation between people who spend lots of time/energy/thought on stuff like this and failure.

I think you'd get similar value by setting an initial partnership allocation (50-50 or 33-33-33 is best-- if they don't bring equal value, find a partner who does), vesting it over 4 years, and meeting every quarter for a "Do we all feel like everyone's holding up their end?" meeting.

I suspect 2.5 hours is far less time and energy than most startup founders put into allocating shares. It's not something that we spent weeks or months on. We actually spent more time blogging about it than doing the actual allocation, and I think the increase in productivity associated with happy hackers was a net win.

Interesting article. Although, I'm not sure about the following statement: "Entry-level developers seem to make about 75k-90k a year in most places." That's seems to be a bit overestimated, at least for an entry-level web developer.

It certainly seemed to be the case for the particular hypothetical developers we would be hiring (the specific languages and technologies we use).

Your mileage may vary, but the general concept (paying market rates) still holds.

Who do you do these monthly valuations with? Investors? Co-Founders?

Obviously the part about valuing the work was referring to work performed by the founders.

Investors were involved in the process as well. It is easy to "value" an investment--it obviously already has number associated with it ;-)

I can obviously forsee issues arising if investors are not on board with this sort of valuation system. We were able to dangle the carrot of giving them some additional rights in our operating agreement, which seemed to make them happy.

Um yeah-- valuation (as most people refer to it) is the process of valuing a company. And no-- valuing an investment doesn't have a number attached to it until you negotiate one (which is the hard problem that PG refers to). If I invest $100k in your company, sure-- I've invested $100k. But at what valuation? Is your company worth $1m post-money, thus giving me 10% ownership? Or is it worth $200k post-money, giving me a 50% stake?

That's the hard part.

Regarding investors not being on board... I'd go a bit farther and say that your system is likely a fundraising death-sentence unless you are already a runaway success who can make the rules. No one is going to invest in a company with a shifting cap table and no formal vesting.

I'm all for innovation, but I don't think you're buying anything here other than additional risk. In this case, the convention method actually works pretty well.

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