How Investors Value Startups Today: Notes, EBITDA and Franchise Deals
How Investors Value Startups Today - Convertible Notes, EBITDA & Franchise Deals
Seed investors, startup founders and acquirers who want to hear how a group of active investors think about valuation, payback and deal terms.
The short version
Investors on this panel say valuation has become more disciplined since the frothy deals of 2022 and 2023. Standard tools like football fields and public and private comparables still apply. Buyers now ask more about management teams and about what happens after the investment, such as ERP and HR systems. Term sheets have also grown longer and more particular. Jack adds a simple test from traditional finance: how quickly will the investment pay itself off?
For seed and pre-revenue deals, Jack favors the convertible note. He likes the flexibility it offers, and how it works depends on the terms of each deal. Another panelist describes buying 14 franchise locations at 5,000 each by working with the franchisor. A deep tech operator says phased validation, executed milestones and DARPA submissions raise value and bring better terms over time.
The 5 big lessons
- Valuation has become more disciplined. The panel says that in 2022 and 2023 people chased deals with some FOMO. Companies now have to actually work, and investors ask more about management teams.
- Post-investment plans matter too. One panelist says the transition after closing is as important as price. That includes ERP, HR and technology.
- Terms sit next to price. Term sheets have gotten longer and more particular. The banker on the panel puts it as: give me the price and I will give you the terms.
- Ask how fast money comes back. Jack asks whether a business can pay off the investment in 4 to 5 years, through a distribution or a clear exit. For existing businesses, he looks at what EBITDA multiple is reasonable.
- Convertible notes keep seed options open. Jack sees the note as a flexible seed tool, and many investors review the specific terms with a securities attorney.
Said on the call
"If the business is over performing or if it is meeting its targets, then by all means it's time to convert that opportunity into equity and benefit from the upside as well."
"Normally, it costs about a quarter of a million on average to launch one of these from the ground up. I was able to structure the deal at 5,000 per location."
"You give me the price, I'll give you the terms, right?."
From the source
- Jack asks whether a business can pay off an investment in 4 to 5 years through a distribution or a clear exit.
- One panelist structured a deal for 14 franchise locations at 5,000 per location, versus about a quarter of a million to launch one from the ground up.
- The same panelist added 15,000 to 20,000 of operating capital and 5,000 of marketing expense per location to scale them up.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: How Investors Value Startups Today - Convertible Notes, EBITDA & Franchise Deals. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around convertible note terms, franchise agreement terms and offering documents. Do not use AI to write your own legal agreements.
Related questions
- How does revenue-based financing work for growing companies?Revenue-based financing gives a company capital in exchange for a share of its sales until the investor is repaid.
- What is a most favored nation clause for investors?A most favored nation clause, or MFN, says that if the sponsor gives another investor better terms, you can ask for those terms too.
- How do I structure an earnout in an acquisition?Tie part of the purchase price to how the business performs after closing.
Questions about this video
Why use a convertible note for seed investing?
Jack says it preserves flexibility and gives the investor discretion over the return and its timing. How it plays out depends on the specific terms of each deal, which many investors review with a securities attorney.
How has valuation changed since 2022 and 2023?
The panel says deals were chased with some FOMO then. Now there is more discipline, more questions about management teams and longer, more particular term sheets.
How can distressed franchise deals be priced so low?
The speaker works with the franchisor, who in the speaker's experience has most of its headaches with its bottom 20% of performers. The speaker says franchisors may want underperformers gone, so in some cases locations can be had at a steep discount.
Put this into practice with the one-liner builder. See all deal structuring resources.
