Pricing the deal

Pricing the deal 





“If you don’t get what you want, it’s a sign either that you did not seriously want it, or that you tried to bargain over the price”

 -       Rudyard Kipling



One of the hardest discussions in the negotiation of an investment is “what is a fair value of a very early stage business?” Traditional valuation techniques are of little use when there are no meaningful numbers and outrageously optimistic projections.

The business valuation will determine the share of the business relinquished in return for funding. This can be a classic deal-killer if a balance can’t be struck between the interests and risk profiles of the entrepreneur and investor.

Some investors like using ‘ratchet’ systems, where the entrepreneur’s holding is increased or decreased over time depending on whether or not performance targets are met. However, ‘unpriced’ deals like this don’t work in the UK where angels are investing under EIS or SEIS tax benefits.

The valuation of the business at the time of Angel Investment has to take into account the risks associated with the investment and therefore is likely to be much lower than the entrepreneur thinks the business is worth.

Don’t be too arrogant about your valuation, such as offer 10% for a £1 million when you don’t even have any customers.

This is ultimately about finding a reasonable position for the future.

The process can be turned on its head:

  •  how much is required to get through to the business plan milestones,
  •  allow for the project to take longer, the customer uptake to be less and slower,

Now you have the required investment, then, think about:

  • how much more money is the business going to require to get to an exit event;
  • how big any option pool may need to be and what are the dilution implications of these.

The market drives valuation. A general rule of thumb is the money raised is roughly a third of your equity at each round. Therefore, pre-money value is probably no more than twice the amount of money you are raising.

As an angel you are looking at 'is this likely to give me a 10x return?’ Angels look at a ten times return to make up for the inevitable failures and the businesses that just stumble along (zombie companies) with little or no chance of exit for investors.

Before you think about what share your investment gets, I think it is worth looking at what has happened to the shareholding before the business sought investment. I believe that how the founders have shared out equity to this point reveals something of their character.

The founders, then friends and family have usually funded early stage businesses. Does the shareholding reflect the effort or the money that has gone in? What are the expectations of all these different parties?

Whatever has been decided on in the early days stays with you forever. Those that seek to go back on deals, whether a handshake or on the back of a beer-mat, are showing their true character. If a handshake is not honoured then "there'll be trouble ahead!" The worst of human nature often shows itself through such actions.


Paul Allen, co-founder of Microsoft, in his book ’Idea Man’, alternately praises Bill Gates, saying he's "everything you'd want from a friend, caring and concerned," and lambasts him for his "mercenary opportunism" and for trying to dilute his share in the company, saying Gates was "out to grab as much of the pie as possible and hold on to it.

Similarly in ‘The Social Network’, Zuckerberg gets investment from “fellow geek” Eduardo Saverin of whose marginally superior social success he is jealous and whom he later betrays by cutting him out of the action in favour of web entrepreneur Sean Parker. Wealthy alpha-male twin brothers Cameron and Tyler Winklevoss plan to launch their own site, called The Harvard Connection, and try to recruit Mark as their tame techie-nerd; initially dazzled by their cachet, Zuckerberg plays them along, fatally delaying their launch while secretly getting his own up and running. Added to this story is the case of Paul Ceglia, who claimed he owns half of Facebook, or at least the founding shares!


Equity is about both value and control, but wise founders realise that outside stakeholders will compromise the latter: subscription agreements, loan documents and board structures do mean sharing power and decision-making. The way to avoid that is never to raise external capital; but few companies are capable of substantial growth without any outside funding.

I'll leave the last word to Luke Johnson - "In negotiations over shareholdings, most partners think they deserve more than they actually get. If the bartering goes well, everyone is likely to emerge feeling a little disappointed – but able to live with the consequences. It is a fine line, juggling competing interests and keeping the show on the road – but it matters."

All material copyright David Hulston Associates Ltd.  @davidhulston1
Meet the team

David Hulston

Indycube Ventures

Indycube Ventures offers funding and expert advice to entrepreneurs. Entrepreneurs and small-business owners based at coworking space network Indycube are being offered access to a half-million-pound annual funding stream and expert advice.



"We have benefited greatly from David's experience, counsel and contacts on a wide range of issues. His past experience in the IP space is particularly useful to Inngot, but even without that, he is just the sort of investor and non-executive director a high growth business needs. He sees potential, makes connections, and keeps us focused on the things that matter."Martin Brassell, CEO, Inngot Ltd