How to Value Your Angel Round?

May 30th, 2007

This is another question that I get all of the time and a very misunderstood topic. The easy answer on how to value an angel round is that you probably shouldn’t, as strange as that sounds. The practice of not valuing the angel round has become very prevalent on the west coast and seems to be picking up steam on the east coast. From all appearances, it may be a trend that sticks. So, how does this work?

Instead of affixing a price to the capital, you give it an interest rate (7 – 10% seems to be pretty common at the moment) and allow that interest to ‘PIK’ (or payment-in-kind…it just means that you don’t pay it out in cash, but you allow the interest to be added to the principal amount and to grow the balance over time). At the time of a VC investment, the idea is that the ‘debt’, including all of the accrued interest, will convert into the round at a 10 – 15% discount to the VC pricing. This has several benefits:
a. aligns interests between all parties,
b. allows you to avoid a potentially difficult and time-consuming process with the angels,
c. provides additional assurance that the angels will not get left behind by the VCs.

If this is confusing, fear not. The next post will be a basic explanation of capital structure principles from an entrepreneur’s perspective.

Entry Filed under: Life as a Start Up