When You Need A Plan Today
For Your Company’s Tomorrow

Determining the value of an early-stage company is part science and part judgment. Unlike established companies with predictable earnings and cash flows, startups often have limited operating history, making traditional valuation methods difficult to apply.

One practical approach is to work backward from the amount of capital the company needs and the percentage of ownership the founders are willing to sell. Ideally, the amount raised should provide enough capital to reach a meaningful milestone, such as completing a prototype, demonstrating market traction, reaching profitability, or positioning the company for its next financing round.

For example, suppose a company needs $250,000 to complete a prototype. From a practical standpoint, it may make sense to raise $500,000 instead. Things often cost more and take longer than anticipated, and running out of capital before reaching an important milestone can put the entire company at risk.

If an investor contributes $500,000 in exchange for 20% of the company, the implied post-money valuation is $2.5 million:

$500,000 ÷ 20% = $2,500,000

Because the post-money valuation includes the new investment, the implied pre-money valuation is $2 million:

$2,500,000 − $500,000 = $2,000,000

This is only one way to think about valuation. Depending on the company and its stage of development, other approaches may include comparable transactions, the Berkus Method, the Scorecard Method, and discounted cash flow analysis.

There is no universal answer to how much equity a company should sell. The objective is to raise enough capital to reach the next meaningful stage of the business while preserving sufficient founder ownership and leaving room for future financing rounds.

Selling too little may not provide enough capital or sufficient upside to attract investors. Selling too much can create unnecessary dilution and reduce the founders’ ownership of the company.

It is also important to avoid setting an unsustainably high valuation early in the company’s development.

For example, if an investor pays $500,000 for 5% of a company, the implied post-money valuation is $10 million:

$500,000 ÷ 5% = $10,000,000

The implied pre-money valuation is therefore $9.5 million.

A high valuation may sound attractive because it minimizes dilution today, but it also establishes expectations for the company’s next financing round. If the company does not grow into that valuation, raising the next round at a higher price may become difficult.

That can result in a flat round or down round, potentially creating additional dilution and complications with existing shareholders.

The objective is not simply to achieve the highest possible valuation. It is to establish a valuation that provides the company with the capital it needs, gives investors an attractive potential return, and leaves room for future financing and growth.

There is no fixed timeline for raising capital. The process can take several months or considerably longer depending on the company, the amount being raised, investor interest, market conditions, and how prepared the company is when fundraising begins.

Preparation is often one of the most time-consuming parts of the process. Before approaching investors, a company should have its financial information, projections, pitch materials, valuation assumptions, use of funds, ownership information, and other supporting documentation organized and ready for review.

Once investor conversations begin, interested investors may request additional information and conduct due diligence before making an investment decision.

Market conditions also matter. When capital is abundant and investors are actively deploying funds, deals may close faster and at higher valuations. During tighter capital markets, fundraising can take longer and terms may become less favorable.

The best way to improve the process is to be prepared before fundraising begins. Clear financials, realistic projections, strong materials, and a well-defined capital strategy can make investor conversations significantly more productive.

Early-stage investing involves substantial risk, and many startup investments will not produce a positive return. As a result, angel and venture investors generally look for companies with the potential to generate outsized returns.

This does not mean every investment must produce a specific multiple. Rather, investors need to see a credible path to creating significantly more value than the company is worth today.

That makes scalability and exit potential important parts of the investment decision. Investors will typically want to understand how large the company can become, how much additional capital may be required, how long their investment may remain illiquid, and how they may ultimately realize a return.

A viable business is not necessarily an investable business. An investable company must generally demonstrate the potential for sufficient growth and value creation to compensate investors for the risk and illiquidity associated with an early-stage investment.

Sol 7 helps companies prepare for the capital-raising process.

Our work may include capital strategy, financial modeling, valuation analysis, pitch deck development, investor materials, fundraising preparation, management coaching, and strategic introductions.

We help founders understand how investors are likely to evaluate their companies and prepare them to communicate their opportunity clearly and effectively.

Sol 7 is a consulting and advisory firm. We do not act as a broker-dealer, placement agent, investment adviser, or securities intermediary, and we do not execute securities transactions or provide legal, tax, or investment advice. Companies should work with qualified legal, tax, and securities professionals when structuring or completing a financing transaction.

There is no shortage of business books, but a handful have fundamentally shaped how we think about entrepreneurship, capital, investing, negotiation, and building companies.

These are books we regularly recommend to founders. Some explain how investors think. Others address valuation, deal terms, capital allocation, negotiation, or the difficult reality of building a company when things do not go according to plan.

And, of course, one explains why we're called Sol 7.

The Martian

Andy Weir

If you're going to understand Sol 7, this is the place to start.

After being accidentally left behind on Mars, astronaut Mark Watney faces what appears to be an impossible situation. He has limited resources, no immediate way home, and an extraordinary number of problems to solve.

What makes the story relevant to entrepreneurs isn't Mars. It's Watney's approach to solving problems. He takes inventory of what he has, determines what he needs, develops a plan, and starts working the problem in front of him.

Building a company can sometimes feel remarkably similar. Capital is limited, the plan changes, things go wrong, and founders have to make decisions with incomplete information.

Sol 7 represents the point where you stop focusing on how difficult the situation is and start figuring out what to do next.

Venture Deals

Brad Feld and Jason Mendelson

If you're considering raising venture capital, read this before you sign anything.

Venture Deals explains how venture financings actually work, including term sheets, valuation, preferred stock, liquidation preferences, dilution, board control, protective provisions, and many of the other terms founders encounter when raising institutional capital.

One of the most important lessons is that valuation is only one part of a financing. Two investors can offer exactly the same valuation while offering very different economic and control terms.

Founders don't need to become securities attorneys, but they should understand what they're agreeing to. This book provides an excellent foundation.

Secrets of Sand Hill Road

Scott Kupor

Founders spend enormous amounts of time thinking about their companies. Investors spend enormous amounts of time thinking about investments.

Understanding that distinction matters.

Secrets of Sand Hill Road provides a useful look inside the venture capital industry and explains how venture funds operate, how VCs evaluate opportunities, how investment decisions are made, and what investors need from successful investments.

For founders, the important takeaway is that a good business and an investable business are not necessarily the same thing.

Understanding the economics and incentives on the other side of the table can make you much better at raising capital.

The Hard Thing About Hard Things

Ben Horowitz

There are plenty of books about how companies succeed. This is one of the better books about what happens when things aren't going according to plan.

Ben Horowitz writes about the difficult decisions involved in building and running a company: running out of money, managing people, making unpopular decisions, changing strategies, dealing with uncertainty, and continuing to operate when there isn't an obvious answer.

That makes it particularly relevant to founders.

Entrepreneurship rarely follows the spreadsheet. Markets change. Products fail. Employees leave. Investors say no. Capital takes longer to raise than expected.

The job of the founder is to keep making decisions and moving the company forward.

Never Split the Difference

Chris Voss

Founders negotiate constantly.

They negotiate with investors, employees, customers, suppliers, strategic partners, potential acquirers, and one another.

Written by former FBI hostage negotiator Chris Voss, Never Split the Difference focuses on understanding the other party's motivations, asking better questions, listening carefully, and negotiating without unnecessarily turning the conversation into a confrontation.

The techniques are practical and particularly useful in situations where the two sides have different objectives but still need to find a way to work together.

For entrepreneurs, that's a fairly good description of most negotiations.

The Outsiders

William N. Thorndike

Growth gets a lot of attention in business. Capital allocation deserves just as much.

The Outsiders examines a group of CEOs who produced exceptional long-term results by making disciplined decisions about how their companies deployed capital.

Should you reinvest in the business? Make an acquisition? Pay down debt? Raise additional capital? Repurchase shares? Sell an asset? Return capital to shareholders?

These are capital allocation decisions, and over time they can be just as important as the operating performance of the business itself.

For founders who eventually become CEOs of larger organizations, learning to think like a capital allocator is an important transition.

The Essays of Warren Buffett

Warren Buffett, edited by Lawrence A. Cunningham

Warren Buffett is usually associated with public-market investing, but many of the principles in his shareholder letters apply directly to entrepreneurs.

The Essays of Warren Buffett organizes those ideas around topics including corporate governance, valuation, capital allocation, acquisitions, accounting, incentives, shareholders, and long-term value creation.

One of the recurring themes is remarkably simple: capital has a cost, management's job is to allocate it intelligently, and creating economic value matters more than simply making a company bigger.

That's an important lesson whether you're managing a Fortune 500 company or raising the first outside capital for a startup.

The Entrepreneurial Mindset

Rita Gunther McGrath and Ian MacMillan

Entrepreneurship is ultimately about recognizing opportunities and determining how to pursue them without having all of the information you'd like to have.

The Entrepreneurial Mindset focuses on identifying opportunities, managing uncertainty, limiting downside risk, and making disciplined decisions while building something new.

That's particularly relevant to early-stage companies because founders rarely have enough capital, enough data, enough time, or enough certainty.

The objective isn't to eliminate uncertainty. It's to understand it, manage it, and make intelligent decisions about where to commit limited resources.

A Final Thought

You don't need an MBA, a finance degree, or a shelf full of business books to build a successful company.

But you should understand the fundamentals.

Know how your business creates value. Understand how investors make money. Know what you're giving up when you raise capital. Understand the terms you agree to. Learn how to negotiate. Allocate capital carefully. And recognize that almost every company, at some point, encounters problems that weren't in the original plan.

When that happens, take inventory, figure out what you need, and start working the problem.

That's Sol 7.