Valuing companies under 200 employees is part art, part science. Venture capitalist Michael Gurau suggests using a comparable public company as a starting point. Here's Gurau's back-of-the-envelope guide to valuing small private companies:
1. Look at the valuations of a few average, comparable publicly traded companies in the same industry or sector. Comparable is the key: A startup software company shouldn't compare itself to Microsoft. If the public company trades at 0.5 to 1 times trailing 12-month sales, start with that figure.
2. Because a private company is, by comparison, illiquid and small, knock down its valuation by 25% to 75% from the public-market proxy figure.
3. If the company is operating at a loss, you'll need to discount even further. Then Gurau assesses the startup's product, technology, market, legal, financial, and team risk, and compares it to an average public company. Says Gurau: "Because a small, private company has so much more risk, you'll always be in a discounting mode, but where [the startup] brings strengths, you'll discount less."
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