Valuing a Growth Stage Startup for Shareholder Liquidity

After a startup has achieved $5 million plus in revenue, it is often referred to as a growth stage company. Growth stage companies have achieved product/market fit and are focused on scaling as fast as possible to capture the market opportunity. With that level of size and scale comes an opportunity for founders and early employees to sell some of their shares as there are many funds designed to provide liquidity for companies growing fast (> 40% YoY) with scale (> $5mm revenue).

Now, the next question is how to value the company for shareholder liquidity. Here are a few ideas:

  • Software as a Service (SaaS) companies are often valued at 2 – 5x trailing twelve months revenue, depending on gross margin, growth rate, and growth opportunity
  • Recent transactions (deals from similar companies) as well as publicly traded companies are often used for comparisons
  • Private companies usually have a discount of 40 – 50% for a lack of security marketability (meaning it’s hard to sell private stock compared to stock in a public company)
  • Non-controlling shareholders usually have an additional discount to their value since they don’t have as much power in the business

So, there’s no exact answer, but a simple approach is to find the most similar publicly traded company, determine the revenue or profit multiple, cut that value in half for being private and non-controlling, and you have a decent approximation.

What else? What are some other ways to value a growth stage startup for shareholder liquidity?

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