Step-by-step price discovery for private companies

May 27, 2022

There is a simple process by which any board of a private company can ensure that it finds a price at which its existing investors and new ones will give it the funding it wants. Aspects of this process are relevant whether a company is heading into a private financing or preparing for an IPO. 

Basically, just ask each investor how much they want to invest in a financing of size X if the valuation were to be anywhere from $0 to some sky-high number. Once you have those data, you’ll be able to identify a clearing price at which the company can raise funds, akin to a Dutch Auction.

Specifically,

1. Send each investor a spreadsheet with two columns. In Column A, write out a range of pre-money valuations going up as high as you like (let’s say 10x higher than your last round) in any reasonable increments (e.g., $10M increments, $25m increments, or 10% of your last valuation, etc.). 

In Column B, ask the investor to write in how much they would want to invest towards a round of Size X if the round were done at that particular pre-money valuation. Something like this: