Transition from Bootstrap (see article) company to capital backed company is a tough position to race in. Most venture capitalists and angel investors fund in two high level categories, ideas and profitable companies needing capital to grow.
The idea companies are the stereotypical "start ups". Idea companies typically don't have revenues, don't have employees, don't have customers and often have little more than a prototype of a product, if even that. Start up companies are all over and they capture a large percentage of overall investment capital.
Companies that have been around, are profitable, have a client base but are restricted from growth mainly because they need cash to fund production or sales expansions are the other major category of investment that capital flows to. Funding for these companies range from cash for equity, lines of credit and loans.
These two categories of investment capture most attention from investors. A hard category to be in is a break-even start up, often referred to as a bootstrap company. In this situation usually the founders have self-funded the start of the business and paid themselves next to nothing. In this situation the traditional role of funding a start up is taken internally. Usually these small break-even, barely profitable companies has employees, products, customers, etc. In other words they are real businesses and well beyond the idea stage. Often the founders lack sufficient capital to spur growth. They need capital to grow BUT they don't fit the mold of established business investment. Larger established companies seeking growth capital typically have assets against which to secure the investment - plants, property, equipment, inventory, etc. They may also have brand recognition and other intangible values that sweeten the deal for investors. The investors defray risk by placing leans against those assets.
For a break-even company tangible assets either don't exist or are too limited to be an adequate secured asset. So the challenge for the break-even companies is they are locked out of the investments at the upper tier and they are forced to deal with investors usually dealing with the idea companies. Idea company investors are used to risky companies and they usually require a large equity stake because of the risk.
Break-even companies are less risky. They have proved market viability, which is a HUGE challenge, for most idea companies. But often idea investors will discount or completely ignore this. Sometimes it will even make the investment less attractive to them because the "possibility of big growth" - the big bang next FaceBook IPO - just doesn't look feasible with a break even company. Ultimately this creates a major divide between preceptions of value. Investors discount the success of being break-even and founders argue lots of risk is gone. Often the two parties can't get past the valuation of the business.
In this situation its best to not value the business at all. If the investment is structured as a convertable loan then the next round of investment will set the value of the company. The original investor earns interest on the outstanding loan and at the point of secondary investment can either cash out or convert their investment at the then next valuation. This puts the founders and the initial investor in the same boat. If the company exucutes in plan then the valuation of the business should go up sharply and if the business doesn't grow well then subsequent valuation would be lower and both initial parties keep less of the company. They succeed or fail together in the same proportion. A third party will set the value and its in both parties interests to work together to get the best deal.
For those investors interested in equity verses a loan then you can use a rachet and claw back strategy. In this investment mode the founders and investors need a middle ground valuation for the company. For example, the investor may be putting in $1 million and wants 40 percent of the company for it. The founder may feel that 20 percent is appropriate. In this case set the middle ground as 30 percent and there is a performance contingency on the 10% difference up or down. So let's say the founder claims they will triple gross revenue in two years with the investment and the investor is doubtful. Create a rachet for the investor if the company fails to reach its goals and create a clawback for the founder if it does.
In our example, the revenue goal for the company in two years is $4 million with $1 million of investment. If the company achieves the goal then the founder "claws back" ten percent of equity from the investor and the investor gets 20% of the company. If the founder fails to achieve revenue goals then the investor rachets up their equity stake to 40%.
Be warned that this type of structure can put founders and investors in enemy camps. One party wins and one party loses. The founder may feel the investor is an "enemy" and not a partner and it can create a lot of strain in the relationship.
When you are seeking funding for your break-even company punt the valuation decision down the field. The true question for any investor is will this company achieve financial growth goals so play the game and set the valuation on achievement.