We use a dynamic equity evaluation model to make sure our founders are treated fairly.
Agreeing on a valuation when raising funds is always a huge challenge for the founder. The entrepreneur is over optimistic, and wants his equity to be priced based on the value he is sure he will be able to create in the future, once he gets the funds. Investors are skeptical, because they have burnt their fingers in the past, and they know that the failure rate for startups is very high. Investors want to see some performance before they get comfortable with valuing the company. The founder is in a fix. How can I prove how well I can deliver without getting the funds to implement my ideas?
One solution is to use a dynamic equity pricing structure . The easiest way to do this is to infuse funds via a CCPS ( compulsorily convertible preference shares), where conversion to equity happens on a pre-defined valuation , which is linked to mutually agreed outcomes. This way the entrepreneur gets to keep as more equity , provided he is able to deliver what he said he would.
For example, let's assume a company is being financed , and the outcome on which valuation will be based will be the number of paying customers the founder is able to acquire 1 year after funding .The valuation could be ₹ X Crores for 10000 users - and ₹ X+Y Crores for very additional 1000 users. The harder the entrepreneur works , the bigger the share of the company he gets to keep, so that incentives are aligned.
A limitation of this is that metrics can be gamed to achieve desired outcomes or disagreements can come up post the agreement. For example, should paying users who drop out after a few weeks be included or not? However, if the intent is right – to create win-win outcomes many of these can be addressed before hand. If one is trying to game measurement of outcomes, one has chosen the wrong partner.