If you think your valuation is 25 cents, that might be a tad high.

I was at a meeting tonight where three companies pitched their plans to investors. One of the companies had taken on 50 investors who were their customers (doesn’t sound so bad – nice to have customers who are such believers). Then all hell broke loose. Someone in the group asked about the structure of those past investments, and the presenter replied that they had used common stock. Setting aside the obvious concerns about non-accredited investors and how they might have been solicited, the group then asked about the valuation that was used for this past investment.

The presenter replied “25 cents.”

Asking for clarification, we learned that what he meant was that they were sold at 25 cents per share. So, unphased, we pressed on. How many shares are outstanding? Fully expecting this founder to say “they’re all excellent shares”, he instead told us that 6 million shares were outstanding, out of the 24 million that were authorized.

I can hear his investors now: “Wow, 25 cents is a great price for a share in this thing! That’s really low! Most of the stocks I hear about are all worth like ten bucks.’

Tip: If you’re going to present to experienced investors, get some experienced advisors and let them talk if you have to. I like the companies that don’t do simple stuff like this. Saves lots of time in due diligence. 😉

file under: Blog, Startups