What is a company valuation?

What is a company capital table?

Every company has at least one class of common share or units (for LLCs) owned by one or more persons or entities. This means every company has a value based on the par value of each share or unit. The par value is set by the company. It is usually very low because when starting a new company there is no reason to value the share price highly. The main reason is to have the ability to issue stock options or unit options to employees. A company builds a capital table usually on a spreadsheet showing every class of shares (common, preferred, warrants, options, convertible notes) and its value at the time it was issued. We recommend you use an attorney to properly build this table.

How is the pre-money valuation calculated?

When a company is raising money, they are issuing new shares or units in the company. These shares or units have a purchase price in dollars. When an investor purchases shares or units, they are investing in a company that has a new valuation. Calculating the valuation is not simple. If the company has only common shares, then the simplest way is to multiply the number of outstanding shares by the share price to understand the valuation of the company prior to the new investors purchasing shares. This is called a pre-money valuation. Once the raise is completed, add the number of shares to the total number of outstanding shares and multiply by the share price, and now you have the post-money valuation of the company.

The reason this can be complicated is because a company can also issue preferred shares that convert at a different share price, convertible notes that also convert into preferred or common shares with a pre-determined price. Add to this the stock options a company can issue that are issued but not exercised and you have a very difficult calculation to understand the real valuation of a company. Financial companies hire experts to make these calculations.

If you want to tell your prospective investors the valuation of the company, we recommend you talk to an attorney who is experienced in building the company's capital table to help you correctly communicate on your campaign page the valuation prior to investors purchasing the securities you are offering.

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