A Back-of-the-Envelope Way to Value a Startup

Video: How to quickly work out what a company is worth, explained using Timbits

Written by Murad Hemmadi

What’s a company really worth? Putting a realistic price on a startup—whether you founded it or are looking to acquire it—is something every entrepreneur should be able to do without external assistance.

With a publicly-listed firm, you can simply look up the market cap. But unless the terms of a recent funding deal have been disclosed, the value of a private company isn’t immediately obvious. It’s particularly difficult to value a company that hasn’t turned a profit yet, or maybe isn’t even collecting revenue. But many of the world’s unicorns—the new name for a company valued at over a billion dollars—are priced based on their potential rather than their present.

We asked a technology analyst at a research and advisory firm (who spoke on condition of anonymity because they aren’t authorized to comment on valuations) for a ballpark calculation, whether or not you’re valuing a billion-dollar firm:

{(E × MS) + 20%} × P

Here’s how it works: Multiply the number of full-time employees a company has (E) by the median salary in the market (MS). Add 20% for operating costs. The P represents the potential of the company, which can be a multiple of two to 50 depending on how fast the customer base in growing, whether it has revenues and how hot the category is. What you get is a gut-check, back-of-the-napkin test to see if a valuation bears any resemblance to reality.

Or watch us put the formula into action, using a marker and some (tasty) props:

Originally appeared on PROFITguide.com