What's My Company Worth?

David Lindsay, 38, is the CEO of Confluentia Group, a New York City startup business analysis consulting firm in the financial services sector. Like the CEOs of many other young companies, Lindsay wanted to grant stock options to Confluentia's employees performance incentives and to set a tone for the company's values. For Lindsay, the decision to grant options to employees was an easy one. However, making a decision about where to set the exercise price and how much of the company to give away was a different story.

"It was important to get that tension right between doing the right thing by employees and senior level staff--in terms of showing integrity, being fair, and encouraging an entrepreneurial mind-set--while also managing to maintain an appropriate level of control over the direction of the company and an equity stake that was in line with the risk I had taken," Lindsay says.

In October 2007, Lindsay found himself asking the all-too-common question that he couldn't easily answer: What's my company worth?

Determining the value of a growing company is a critical step. It will come into play not only when granting options to employees, but also when raising capital from investors, selling assets or buying out a partner.

Value your company too low, and you can give too much of it away. On the other hand, value your company too high, and you may turn investors away when you're raising future rounds of capital.

According to Carmel, Indiana independent valuation expert Michael Pellegrino, the process of determining a company's value is part art and part science.

"The science is in the mathematics: looking at cash flows, revenues and assets and crunching the numbers," Pellegrino says. "The art is in knowing how to apply those numbers in a way that is going to be appropriate and credible."

Valuing an early-stage business can be especially difficult. Early-stage businesses tend to be short on assets or steady cash flow, factors valuation analysts use to assess value. Without these, early-stage company values are based more in the art of valuation methodology rather than the science, and according to Pellegrino, this is where experience becomes critical.

"During the dotcom era, you really began to see that standard methods of valuation didn't apply to early-stage companies," he says. Investors came up with new methods for valuation that placed more emphasis on factors like customer acquisition cost or click-through rates.

But at the end of the day, many of those methodologies churned out estimates that were imprecise and/or inaccurate. Nevertheless, the calculus was significantly altered.

"Valuation methods for early-stage businesses can vary widely in philosophy, and determining an accurate number that can be relied on is sometimes a problem for management," Pellegrino says.

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