Structuring The Private Placement Investment- Development Stage Or Start Up Company Valuation

The question:

As the economy has been gaining strength, so have the number of entrepreneurs seeking private equity investments through pre-packaged structured private placement offerings, and negotiated venture and angel capital sources.  A question that arises almost daily in my practice is how to determine a valuation for a development stage or start-up venture.  Determining a valuation is instrumental to answering the overriding questions of what percentage of a company is being sold and at what price.

The Answer:

For business entities with operating history, revenue, profit margins and the like, valuation is determined by mathematical calculations and established mathematically based matrixes.  For a development stage or start-up venture, the necessary elements to complete a mathematical analysis simply do not exist.

In the case of a pre-packaged private placement offering for a development stage or start up venture, valuation is an arbitrary guess, a best estimate.  In the case of a negotiated investment with a venture capital or angel