Valley of Death
The valley of death, refers to the point in time in which an early stage company has begun operations, but has not yet generated revenue—resulting in the depletion of the initial equity capital received from investors. Surviving the death valley curve requires that the startup either:
- Generates sufficient revenues to become self-sustainable
- Raised significant capital, is growing rapidly and plans to raise more capital soon
- Has access to more lines of credit or capital to fund their operations
Startup valuation refers to the value of an early stage company taking into account market forces. In periods of economic expansion valuations are stretched, in periods of economic compression valuations are squeezed. Factors that can affect a company’s valuation include their: traction, growth rate, revenue, leadership team, industry and competition. In 2022, late stage startup valuations are being slashed almost daily, e.g. instacart, Dbt Labs…etc.
A valuation cap refers to the point in time at which an investor can convert their SAFE into equity in the business, and is based on either a valuation or price target. It “caps” the conversion price of the issued shares and ensures that early investors receive an immediate upside on their equity purchase.
Early stage startups leverage valuation caps to incentive their seed stage investors to take on additional risk. The lower the valuation cap, the larger the percentage of equity the investor will get.
For example, if the current price per share is $5 and the SAFE has a 50% discount, the investors would convert it into shares at $2.50 so that they recognize an increase in value of $2.50 on pape