Valuing a tech startup

Discussion in 'Accounts & Finance' started by emmalr, Feb 22, 2021 at 8:46 PM.

  1. emmalr

    emmalr UKBF Newcomer Free Member

    11 2
    I was wondering if anyone here can help with some advice.

    I am selling a large chunk of my shares back to my co-founder because we can no longer work together.

    Our business is a few years old with only a years sales (25k profit). We have developed two software applications (one browser custom built and one hybrid app). We have spent around £200k developing software and an algorithm but all money came from grants),
    We have a good potential sales pipeline and talking with some big brands although they're not over the line. We've also got some really good brand recognition through press and awards (don't know if this makes a difference).

    What advice do you have for trying to work out a fair price for the company? Thanks in advance.
     
    Posted: Feb 22, 2021 at 8:46 PM By: emmalr Member since: Jul 8, 2004
    #1
  2. MBE2017

    MBE2017 UKBF Ace Free Member

    2,125 807
    Sounds like the company is high in potential, but low on real value. Every company has potential, but that is for the new owner to capitalise on.

    I will leave better and more knowledgeable people to try and help re value, maybe someone like Clinton might see this post.
     
    Posted: Feb 22, 2021 at 8:51 PM By: MBE2017 Member since: Feb 16, 2017
    #2
  3. billybob99

    billybob99 UKBF Regular Free Member

    1,845 648
    Name your price.
     
    Posted: Feb 22, 2021 at 8:56 PM By: billybob99 Member since: Apr 23, 2013
    #3
  4. Nico Albrecht

    Nico Albrecht UKBF Enthusiast Full Member

    931 206
    Well you both should reimburse the 200k taxpayers money first plus interest and see what is left after that on the balance sheets. I reckon the value would be quite in the negative range which makes your share price worth pennies.

    If the company would be worth anything you would resign as a director and keep the shares. No need to work there anymore and dividents if ever declared coming your way.
     
    Posted: Feb 22, 2021 at 9:09 PM By: Nico Albrecht Member since: May 2, 2017
    #4
  5. fisicx

    fisicx It's Major Clanger! Staff Member

    33,982 10,094
    You make up a number. They make up a number and you settle somewhere in the middle.

    A potential sales pipeline has no value.
     
    Posted: Feb 22, 2021 at 9:10 PM By: fisicx Member since: Sep 12, 2006
    #5
  6. Mr D

    Mr D UKBF Legend Free Member

    27,231 3,345
    Potential? Not worth anything until it is developed.
    Every business in the world has potential to be bigger than Amazon. You want potential to have value then develop it to show income.

    By the sound of it the business is worthless currently. Later it may be worth something. Or not.
    Lots of businesses go under in the first few years.

    Keep the shares until an offer is made that you want to accept.
    You stopping working there is usually seperate from being part owner. Unless there is something in shareholders agreement or contract regarding what happens to shares when you leave.
     
    Posted: Feb 22, 2021 at 10:05 PM By: Mr D Member since: Feb 12, 2017
    #6
  7. SillyBill

    SillyBill UKBF Regular Free Member

    358 196
    Obviously the money in tech start-ups is being bought by a company with...lots of money. Don't get your eyes turned by anything other than reality here. I suspect your business partner has little cash (judging by your profit) unless he is independently wealthy of that business. In which case what do you expect - he can't pay you more than he can afford and from his p.o.v. if he realises the "potential" then he should gain from it. In other words unlikely to promise future gains to yourself. If I was him/her and if generous (as in I saw the potential) I'd perhaps look to offer you an amount that means you got out a fair rate for your labour input (assuming you have worked for zilch or very little) over the set-up process and call it done there. Perhaps that is what you should ask for, your time compensated to get it to this point. I agree with others that the business is very arguably not worth anything so I'd class that as a result.
     
    Posted: Feb 22, 2021 at 10:31 PM By: SillyBill Member since: Dec 11, 2019
    #7
  8. DontAsk

    DontAsk UKBF Ace Free Member

    1,846 289
    Does he know this? He will use it as a hammer to get a better price for a distressed sale.

    Is there no way you can get on until the company is successful and thus worth more?

    You don't have to continue to work for a company to own shares in it.
     
    Posted: Feb 23, 2021 at 4:38 PM By: DontAsk Member since: Jan 7, 2015
    #8
  9. gpietersz

    gpietersz UKBF Ace Full Member

    1,852 447
    I would normally agree with the "potential is not worth anything" argument, but I have seen many examples of successful fundraising by tech companies on the basis of potential or unproven technology,

    That said, its probably best to sell when your co-founder also wants to sell or raise funding. Is there anything stopping you from keeping the shares but stopping working as @DontAsk suggests.
     
    Posted: Feb 23, 2021 at 5:29 PM By: gpietersz Member since: Sep 10, 2019
    #9
  10. The Byre

    The Byre UKBF Legend Full Member

    10,827 4,632
    My tendency would be to ask for a small percentage of gross turnover as this is normal for a very speculative IP product. Structuring that deal would have to attach the % onto the software and not the company - except that would poison the deal for any purchaser. So you are back to half of whatever you two get for the company.

    But as stated above and several times, the company is not worth anything other than its assets minus liabilities - £25 profits (net - gross - what?)

    The £200k in investment grants is irrelevant. It could have been £200m and it would not move the dial one point to the right. Unless an initial investment went into assets, they are always money spent, wented* and gone!

    *A Goon Show word meaning the past tense of went.
     
    Posted: Feb 23, 2021 at 5:49 PM By: The Byre Member since: Aug 13, 2013
    #10
  11. Clinton

    Clinton UKBF Legend Full Member

    5,162 2,334
    That's usually big companies. Huge companies. Companies with significant first mover advantage or in a sector that has a high barrier to entry or with millions invested in IP.

    When it comes to small tech companies, even investigating the potential is largely a waste of time as there's a huge cost to doing the investigation. And when you've formed an opinion about the potential it's still a waste of time given the fact that it's a small company (so more likely to fail). And then if you complicate it with one of the founders bailing, I think the chances of an external investor seeing investable value here is close to zero. That's even IF you can find an external investor willing to take just 50% rather than full ownership and control.

    So if there's no market value to the business, then their Shareholders Agreement will cover how to value the business. Problem solved.
     
    Posted: Feb 23, 2021 at 6:25 PM By: Clinton Member since: Jan 17, 2010
    #11
  12. JEREMY HAWKE

    JEREMY HAWKE UKBF Legend Full Member

    5,565 1,992
    Based on the above
    I would like to come in with a few hundred
    Really nice to be working with you I see lots of potential potentially :)
     
    Posted: Feb 24, 2021 at 7:00 AM By: JEREMY HAWKE Member since: Mar 4, 2008
    #12
  13. gpietersz

    gpietersz UKBF Ace Full Member

    1,852 447
    Most obviously bigger businesses, but I have seen it in SMEs too: investment in technology of hundreds of thousands to this being used to claims valuations in millions or tens of millions for fundraising purposes, sometimes successfully or partially successfully.

    Of course they will either crash and burn or they will sell for a valuation which means they are no longer an SME.

    Agreed, that is why I think keeping the shares for now while not working in the business is the best approach.
     
    Posted: Feb 24, 2021 at 11:53 AM By: gpietersz Member since: Sep 10, 2019
    #13