Rules of thumb for startup investment valuation

Once you have a potential investor excited about your team, your product, and your company, the investor will inevitably ask "What is your company's valuation?" Many technical entrepreneurs stumble at this point, losing the deal or most of their ownership, by having no answer, saying "make me an offer" , or quoting an exorbitant number.

In a previous section, I discussed how to calculate how much money you need. This section will help you determine how much of your company the investors will expect to get for that amount of money. That's what the valuation discussion is all about.

It is a complex and mysterious subject, and I don't plan to cover the theory or any academic approaches here. I'll be offering you a rules of thumb common sense approach, and I'll use a hypothetical health-care website company named NewCo as an example to illustrate the points.

Two founders have spent $200K of personal and family funds over a one-year period to start...