Most of the things we shop for these days come with a sticker price. Even things we assume will have some room for negotiation–like cars and houses–usually come with a price tag. And so many entrepreneurs think they should put a price tag on their startup when they approach investors.
Alas, that is generally a bad idea, at least in the context of pitching to professional venture capital investors and more sophisticated angel investors. In no particular order, here are a few reasons startups should not come with sticker prices:
1. Venture capital investors and more sophisticated angels think of themselves as the experts when it comes to putting a price on a startup. If you tell them the price up front, they will likely think you don’t know the way the game is played.
2. Different investors bring different “value adds” to a deal, and those can have a significant impact on the price. For example, any sensible entrepreneur would give a better price to a well regarded top tier venture fund than they would give to an off-brand angel.
3. Whether in terms of price per share or pre-money valuation terms, the sticker price is only one (albeit the most obvious) factor in the real price of the deal. Other factors include the form of the liquidation preference, dividend terms, redemption provisions, and many others.
4. As many an entrepreneur can attest, “startup time” is usually much faster than “investor time.” That is, a lot of things can happen at a startup–many of which can add a lot of value–between the time the first investor presentation is made and the time a lead investor commits to a deal. Why commit to a price at the beginning of the process?
5. A startup is more like a vintage Ferrari than a new Ferrari. While the later may come with a sticker, the former is better sold at auction–preferably after the potential buyers have had a chance to take a spin around the track.
6. If you do put a sticker price on your startup, you run the risk, if it is too high, of stopping a conversation about your startup before it has even started. On the other hand, if it is too low, you will likely never get a chance to bump it up. Heads you lose, tails the investor wins.
None of this means that entrepreneurs should not have some ideas about the price of their startup in mind on the front end. Good entrepreneurs will have a feel for the market, and will let potential investors know that–and that they ultimately expect a fair market price.
As for specifics, though, that fair price will reflect, at the margins, a lot of particulars about a deal that just can’t be nailed down until a specific investor steps up to negotiate a specific deal.
More articles by Paul A. Jones
- The Good Angel Investor (Part 1): Doing the Deal
- Angel Investing outside of the major venture centers: Special challenges
- The good angel investor (Part 2): After the closing
- Entrepreneurs with (bad) attitudes
The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of WTN News. WTN accepts no legal liability or responsibility for any claims made or opinions expressed herein.