How Do You Price Your Startup’s Next Round Of Funding?

Years ago, when I was an Entrepreneur in Residence at a San Francisco based venture capital fund, Dave, the partner I worked with, and I met with the CEO of a semiconductor company looking for Series B funding. I knew the CEO and I knew the space his company was competing in really well which was why I was in the meeting.

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Picture: Depositphotos

The company had accomplished a lot since they had raised their Series A funding. I was impressed, and I could tell Dave was impressed as well.

Near the end of the meeting, Dave asked Mark, the CEO, what he thought the company should be valued at for the next round. Mark calmly looked at Dave and said, “We’ll let the market decide what the value of the company should be.”

You’re doing the right thing when you let the market decide what your company is worth.

Dave smiled and said to Mark, “You’ve been coached well.”

With that one simple comment about letting the market decide, Mark had put the onus on the investors to make him an offer. And that’s as it should be because investors are the market for you company.

You are only likely to hurt yourself if you try and name your price.

Dave was hoping Mark would throw out a price because it could only hurt Mark not help him. Think about it. There were three answers Mark could have given Dave:

A. A price above what Dave and his partners were willing to pay, or…

B. A price below what Dave and his partners were willing to pay, or…

C. A price that Dave and his partners were willing to pay.

Remember that investors have done many more deals than you ever have. And professional investors like Venture Capitalists are usually very disciplined.

So if you make the mistake of pricing yourself way over the market price, then you may scare off potential investors. Obviously if you throw out a low price, that hurts you too.

The only chance you have of not hurting yourself is if you throw out the right price. You’ve got a 33% chance of getting that right. I don’t know about you, but I don’t like those odds.

You don’t lose the ability to negotiate if you let your investors make the first offer.

Chris Voss, the former lead hostage negotiator for the FBI, explains in his fantastic book, “Never Split The Difference,” that you always want the other side to go first. The reason is you may hear a price that’s above your expectations.

More importantly, you lose nothing by letting the other side go first. You can always make a counter offer.

“But what if they make a very low offer?”

Yes, there are some hardball negotiators that like to anchor the start of the negotiation with a very high (or low) price. The key to defeating that strategy, as Voss explains, is you have to be mentally tough, so you ignore the high (or low) price.

The way to get the best deal is if you have another potential investor.

Let’s say you have multiple investors that are ready to give you competing term sheets. So, when you get a term sheet and you have a few investors that are close, you should let them know you have a term sheet.

Hopefully, at least one of the other potential investors will step up. Then you’ll have multiple investors competing for your deal.

Now, if you’re lucky enough to be in this position, you can negotiate from a position of strength. Then you can negotiate better terms.

That’s what happened in Mark’s case. Mark had multiple offers to choose from including ours. And no, we didn’t get the deal…

For more, read: What Are Four Decisions You Need To Make Before Raising Money?

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I work with startup CEOs to help them grow their businesses . I built several businesses from $0 to >$100M. Learn more at www.brettjfox.com

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