Startup idea valuation – How much should your idea value and will it translate into more equity?

We at Founder Solutions (www.FounderSolutions.com) were figuring out the way to compute startup idea valuation to be used by our innovative algorithm for our upcoming PieChopper tool which allows startup founders to divide equity fairly. To put a price tag for your startup idea is very difficult and probably much more difficult than putting valuation to your startup before funding round as for valuing your company, you might have knowledge of some tangibles, investments, team expertize, pilot, sales forecast etc.

So how to value your ideas in numbers? You might need to do it so that it can be taken into account as an investment or contribution in some way to your startup and possibly will want some equity incentive based on that.

Idea Valuation

Idea Valuation

Our first assumption was to give “equity premium” to the founder who came up with the original idea in agreement with the other founders. Initially, it looked justifiable as the founders will get some credit for coming up with the idea which resulted in the startup to be founded in first place and get some agreed share of equity as a result. But as we did our user tests with real world founders, it became more and more clear the premium might sound justifiable initially but won’t be fair in the long run. For example, if a founder asks 5% of the equity premium for his idea. He will be reserving 5% of the equity irrespective of other contributions by him or his other co-founders. If the idea founder invests 1000€ but his co-founders are investing 50,000€ and doing most of the work in the startup, it won’t be fair to reserve 5% equity irrespective. Needless to say that the idea initially during the founding stage would be unproven and most probably will go through multiple iterations before it gets market adoption.

The second scenario we considered was to ask founders about the tangible value of the idea based on the possible IP (Intellectual Property) it brings. But that consideration was met with our own criticism after giving some more thought as most ideas can’t be translated into IP like patents etc. Also, even if they do, it won’t be possible to accurately measure the value of the generated IP.

idea patent

Idea IP value

Finally, we came up with the conclusion to solve the problem by:

  • Asking the relative contribution to the idea between the founders as multiple founders could very well input to the implemented idea.
  • Asking the value of the idea in monetary terms from each founder and then using the average value of the idea for equity calculations. This will allow negate the over valuation by the original idea founder and possibly result in a fair agreement with constructive discussion about the value of the idea.

Our equity-split algorithm then uses the input from above two questions to decide the idea valuation and internally uses to compute equity distribution between the founders. What do you think about the idea valuation and the idea contribution in terms of equity split?

Note: You could register to get early-access to our PieChopper tool by registering at www.FounderSolutions.com

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Your big startup idea – busting the common myths!

It’s a very common misconception in entrepreneurship that all it takes is a great idea to build a billion-dollar successful company. Some entrepreneurs or “wantrepreneurs” even go as far ahead to value their idea to be as great to be worth millions of dollars in itself. However, every startup or company is built on the foundation of great idea(s) evolved over time and the idea plays a crucial part but it’s not the sole criteria for success of the startup. Here are some common myths related with the “big startup ideas” and our proposed reality check:

Myth #1: “All I need is a novel idea to create my successful startup.”

Reality check: No! Idea without execution is nothing! It’s as simple as that. To be successful, it requires impeccable and timely execution with a great team willing to modify/pivot from the original idea as needed. As Scott Belsky, CEO of Behance puts it simply:


“It’s not about ideas. It’s about making ideas happen”


Myth #2: “I got an original idea.”

Reality check: Chill out! Almost all the ideas are never original and somebody in this big world for sure would have thought about it. Besides it’s not even a shame to not come up with an original idea. You would be pleased to hear that big majority of successful startups are based on the ideas which were not unique. Most of the best startups are based on a pivot/modification to an existing business model rather than an unique idea. Paul Rand, one of the foremost American graphic designers of the 20th century, said it best:


“Don’t try to be original, just try to be good.”


Myth #3: “Somebody might steal my idea if I share.”

Reality check: Don’t worry, as mentioned in above point, almost no idea is original. The world is big enough to believe with near certainty that somebody must have thought about your idea already. Anyway, even if your idea is unique, it’s worth nothing without your ability to execute and deliver. Also, before you execute you might want to validate your idea by sharing it to others and getting the feedback e.g. about the business potential, customer segmentation, market perception, market size and so on. There might be possible modifications or tweaks needed based on the market feedback before you go full-steam with the execution. Kyle Bragger, co-founder of Forrst, puts it:


“Get your idea out in the wild, iterate your ass off, and hopefully build something spectacular.”


Myth #4: “I own a million-dollar idea!”

Reality check: Come on now, who are you kidding? Million-dollar ideas don’t exist! But billion-dollar companies do as a result of world-class execution! As mentioned before, it’s the execution which counts and valued, not the idea itself. According to Thomas Edison, Co-founder of General Electric:


“The value of an idea lies in the using of it.”


 

I came across the article by Derek Sivers at http://sivers.org/multiply and I totally agree with his analogy that “Ideas are just a multiplier of execution.”  Below image shows the multiplier values of ideas and execution values:

Idea Valuation

According to Sivers, the most brilliant idea, with no execution, is worth $20 and the most brilliant idea takes great execution to be worth $20,000,000.

Next time when you hear that my idea is worth X, you know what to ask! 🙂