In this discussion with Jeremy Glaser, who is a partner at the law firm Mintz Levin and also serves as Co-Chair of the firm’s Venture Capital & Emerging Companies Practice, we discuss when and how to discuss the valuation of your startup and expected pre-money with professional investors, including VCs.
Bottom-line, you should show flexibility and a willingness to work through valuation with the right VC investors instead of being dogmatic and inflexible around valuation.
Patrick: There is this big debate. In my ask, should I tell them what my pre-money should be? If you don’t do it, then you’re wrong. If you do it, then you’re wrong. I’d rather say, “This is what we’re looking for but we’re flexible. For the right investors, we’re flexible. We’re going to work with you. It’s important to me as the CEO, and my founding team, that we have you on board with our company for these reasons.”
Jeremy: I think that is the best advice for entrepreneurs. It always baffles me why we have this debate about whether or not you should answer that question about valuation. I try to express to people that the VC is asking you your opinion about valuation, not because he wants to know how much he has to pay to buy your company. It’s because he or she wants to know if they should waste their time talking to you anymore.
You should never answer that question. The only way to answer it is the way that you just mentioned. “You’re a great venture capitalist. I think you’re going to be a great partner. I am sure we’re going to reach an agreement on valuation. Now let’s talk about the deal, the company and different steps of revenue.” It will all get worked out.
Some people say, “Then aren’t I wasting my time? I spend three or four weeks with this person and then find out they’re not going to step up to my valuation.” My answer is, no, you haven’t wasted your time. You’ve improved the possibility that they might pay a valuation that you would find acceptable by going through that process.
If, at the end of the process they didn’t, you can always say no. You’ve gained a lot from the experience of going through that process with them. There’s no reason to cut off the opportunity to get a deal done prematurely when they haven’t had that investment of time and energy, to get to the point where they’re in a position to say, “We think the company should be valued at X.”
This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matters.