In an increasingly dense technology startup market, entering the investment arena is a risky venture. To prepare the uninitiated, San Antonio Business Journal shared insights from experienced executives, including Jackson Walker partner Stephanie L. Chandler discussing startup valuation, red flags, and raising money.

As the Firm’s Technology chair and a founding member of JWStartup, Stephanie has a track record of working with clients from the earliest stages of their development through significant liquidity events, typically in the role of outside general counsel managing the legal issues related to each growth stage.

On How Much a Startup Is Worth

“Valuation is a complex issue because if it’s a pre-revenue company then your valuation is going to have to be based on some type of analysis of expected future cash flow and factors that will impact the likelihood of return, such as whether the company will be in a hot space when it’s time for an exit and whether you have the right team to take it there. Valuation for early stage ventures is more of an art than a science. I remember 20 years ago, one investor quipped that for a really early stage company a pre-money valuation can be up to $4 million. You give them up to $1 million for a good management team, $1 million for a good marketing strategy, $1 million for an IP or other strategy to beat the competitors, and $1 million for a good product or idea.”

Red Flags

“One red flag for investors is a founder that hasn’t contributed [intellectual property] into the operating entity. It shows that they want you to invest but the founder is not willing to make the same bet to put their IP at risk by only doing a license. Another red flag is executive team members who are overly compensated in salary rather than split between salary and equity ownership, which aligns their interests with the investor.”

Raising Money

“I think the bigger issue is that somebody raises too little from investors where it can’t get to a milestone that impacts value [of the startup]. For example, if the investors are trying to raise $300,000 to get a portion of the software project developed but still has to raise money to complete it before they go to market, it’s a problem because there’s no assurance that the other money will be raised.”

For more insights on technology startup investing, read San Antonio Business Journal’s “Art of the Deal: Investor’s Guide for tech startup investing (slideshow).”