Back to basics: what is valuation?

Continuing our “back to basics” snippets (see here on basic deal types and here on the types of angel groups), we are going to have a few posts about the “economic” terms of angel investments.

First up, what is “valuation” all about?

Most people get the basic idea about buying stocks. Apple’s share price is $139. There are a lot of Apple shares, so that if you would buy them all at $139 per share the total cost would be $730 billion. That’s Apple’s market cap, its valuation.

Angel deals work the same way. We buy shares in a company. When we speak about “valuation,” we mean the share price multiplied by the number of shares, to give a total valuation.

So, for example, we might invest in a company at a $2 million valuation.  This means we buy shares at a price that means if we bought all the shares in a company it would cost us $2 million.

This doesn’t mean we’re investing $2 million, or that our shares are worth $2 million, or that the company is receiving $2 million.