To find out what is the right valuation for the first cheque, it would be worthwhile  to study the valuations in later funding rounds. The organised angel networks usually operate between Rs 6 crore and Rs 15 crore pre-money valuations, in post-beta companies. The size of  deals ranges between Rs 1 crore and Rs 4 crore for equity stakes of between 15 per cent and 30 per cent. Seed stage funds also have similar valuations; usually investing less than $1 million (approximately Rs 4.9 crore) for stake above 25 per cent.  Although, of late, some deals have started happening in the $ 2 million (approzimately Rs 9.8 crore) ticket size, post the FFF round. A few have raised even $4-5 million seed rounds for e-commerce SEM budgets, but that may not happen again for a while.

So a very lucky company will raise $2 million after their first Rs 10 lakh or Rs 50 lakh cheque, at a pre-money valuation of say between Rs 15 crore and Rs 24.6 crore ($3 million or $5 million). Assume a Rs 15 crore pre-money valuation. At this point you would expect the angel investor to multiply their money by 2-4 times. This gives a pre-money valuation range of between Rs 3 crore and Rs 6 crore.

If the company has to settle for a Rs 2 crore round at a Rs 6-8 crore pre-money valuation, the angels stand to barely double their investment.

It is important to note a few things:

1. While the promoter gets compensated with salaries, MSOPs (full form) etc. and the investors have their preference rights, the FFF gets the worst of both worlds.
2. Many a time, they are forced to take exits at deep discounts. So their downside is unlimited but upside is capped.
3. Large part of the initial cheque goes to co-founder salaries

Suggestions for FFF angels in India:

1. Play in the safe range of Rs 2-4 crore valuations and write small cheques less than Rs 50 lakh in total. You may need to provide more for the long winters.
2. Take partial exits if you like the plan going forward. But when in doubt, take full exits if feasible.
3. If you continue to be invested, retain as many rights as possible
4. Don’t try to take more than a 20 per cent stake. It will surely mean that you will have to exit in some future rounds to make room for others.
5. Convince co-founders not to take salaries till the next round.

About the columnist: Anand Lunia is executive director at Seedfund where he leads investments in technology, Internet, education and retail startups. He has 15 years of experience as an entrepreneur, venture capital investor and corporate executive. An IIM Lucknow alumni, Lunia was co-founder of one of India’s earliest elearning companies, Brainvisa Technologies (acquired by Indecomm Global Services) where he created the business plan, led the team in fundraising and facilitated the exit of the company’s venture capital investors, earning them five times their investment. Follow Lunia on Twitter.