We're finalizing the details of a new shareholders agreement but we're stuck at setting the EBITDA multiple that will get used for future valuation of the company.
The agreement was written by one of the new investors (VC). but the other investors commented that EBITDA is the wrong way to calculate the valuation of a social technology startup that has assets like its users, and that should be looking for revenue and market share.
The startup could be not generating high revenue, but the numbers of its users for example could be another thing that should be part of the equation as it represents an opportunity and a market share.
We're confused and don't know what is the right method to use. I hope that there's a standard for something like that.
There is no standard way of putting a value on a young startup. Each market opportunity, team, "unfair" competitive advantage & technology component is unique.
That said, your second investor is probably correct that earnings is a lousy way to value a social tech startup. Social media startups typically have business models strongly influenced by network effects -- the value increases dramatically as the number of users grows.
There are some structured, consistent methods out there. The ACA has a good overview of some of the better methods -- read this and follow the links.
However, the simple truth is that: In many deals the valuation is dominated by comparison to ""comparables"", i.e. by looking at what other somewhat similar startups have been valued at recently. There is a lot of herd mentality in early stage valuations.
When a VC invest in a startup he/she is really investing in potential - either the potential to be the next Facebook/Google or be acquired by Facebook/Google.
Both Facebook and Google earned next to nothing for a very long time and most companies acquired by the giants for outrages amounts of money never showed anything close to a positive ROI before being acquired - so earning is completely irrelevant to that potential.
For the "lottery ticket" companies that either make billions of dollars or fail miserly that VCs like earning is irrelevant, those companies need to get really big really fast and most methods of doing this are based on giving up revenue to get more users.
On the other hand for companies that aim to provide nice stable long term profits and not bet on being acquired earnings are one of the most important things.
Its really important you and the investor agree if you are a "be acquired by Google for a billion bucks or go bankrupt" company or a "provide very good ROI for a very long time but not take over the world" company.