What You Don't Know About Valuation Will Cost You Money
How would you feel if you sold $2 million “worth” of Google stock and received $50 in cash instead of $2 million? This happens to venture-backed companies everyday and that's why understanding valuation is critical.
The terms “value” and “valuation” are used a lot for high-growth private companies and that's a bad thing. It's bad because when founders, VCs, angels, attorneys, CFOs, CEOs, and employees use these words and don't truly understand what they mean, those same people end up losing lots of money as a result.
Imagine you log in to your brokerage account. You see your 2,000 shares of Google valued at $2,000,000, place a market order to sell all 2,000 shares, and wait for it to clear. A few minutes later you get a confirmation that you sold 2,000 shares, received $0 in proceeds, and owe the brokerage firm $50.00 in commissions. A transaction you expected to put $2,000,000 in your pocket has instead effectively taken $2,000,050 out of your pocket. How would that make you feel? What would your spouse's reaction be? Most of us would experience a rapid increase in heart rate and an unpleasant feeling in our stomachs. The culmination of this fight-or-flight response would at least be a call to our broker to find out what happened to the other $2,000,000 (yours) and get it back.
Yet this same scenario plays out for real every day for VCs, founders, angels, limited partners, strategic investors, CEOs, CFOs and ...