I've a well-established project (prototype demo, good team and past, audience data, stats, etc.) in the area of video game industry. The project is at the beginning, we planned to go Kickstarter but in the meantime, at least one investor got interested in it. They already spent hours with me (Viber, real life meeting etc.), so I think this is a good sign.

The EBITDA at the end of the 3rd year in my business plan is 4.5 million USD. What EBITDA multiple shall I use to estimate the value of the company? (i.e. their possible exit multiple at the end of 3rd year)

Remember, it's video games (PC games) industry, not casino or real-world gaming. I can't find such data anywhere.

The capital that my business plan needs from the investor is 2 million USD. If the EBITDA multiple is not small, I probably don't need to offer him too much percent (%) share (considering the $4.5M ebitda at the end of 3rd year).

There is no standard valuation method. The entrepreneur typically calculates a higher valuation than the capitalist does. 'Tis always thus, and ever shall be. There are numerous valuation methods - you simply have to come up with a range, and be prepared for the capitalist to come in below that (or at the bottom of your range), and then to negotiate.

Thanks. Is there at least some minimum EBITDA possible in my case? I mean, since it's a software company that has a high profit in the 2nd and 3rd year, maybe you say it's at least 2.5. But maybe you will say it can range from 0,00001 to anything even in the field of successful software companies.

In other words, if I use 2.5 (and I think that's pretty conservative), I will have to defend it if the investor asks: "OK, could you tell why you used 2.5?". (Values typical to a particular industry at least could help in such a case.)

Is there at least some minimum EBITDA possible in my case?

Nope. Also the number is usually only valuable when comparing large publicly-traded companies. It is almost a useless number for a startup.

Basically it is a "feels right" number to account for non-numeric information.

As you seem to already understand, the multiplier is applied after figuring out your actual cash flow.

A small startup may have a small cash flow valuation earning a half million dollars. Then it may receive an enormous multiplier when people discover the technical leads are Linus Torvalds and John Carmack, and marketing is lead by the summoned ghost of Steve Jobs.

A larger startup may have a high valuation showing earnings of two hundred million per year. It may then have the value dropped to near-zero when people discover the management has a history of fraud and has previously lead successful startups into the toilet.

Really the number only makes sense once the businesses are large enough that individual contributions and individual products mean little. Think on the scale of Microsoft, Apple, and IBM, or other multinational companies. If the company is such that one person or a single product overwhelm the value of year-over-year earnings, those uncountables outweigh the countable earnings numbers.

So, essentially, you're expecting 4.5M in revenues at year 3, and are asking for a startup of 2M?

How solid are these projected numbers?

Seems to me like they'll go for a large chunk of your company for these 2M...

It depends on your business model. If you are relying on creating one hit after another without a predictable revenue then the multiplier is going to be lower. If you're creating a subscription based business (or at least something that stands to generate consistent revenue like a F2P game that has a steady revenue stream) then your multiplier could be higher. A company I worked for previously got a 8x multiplier due to the success of their F2P game.

With that being said, an investor will be hard pressed putting money in and the valuation being based on what the value of the company COULD be in 3 years. They will see how valuable your idea is today and weigh it against all of the internal and external risk factors.

Financial projections of a startup are generally wildly inaccurate no matter how hard you model them. And you do not have stable positive cashflow to calculate EBITDA. Any sort of DCF or multiple method is basically useless until you are regularly generating hundreds of thousands of dollars.

The more fundamental mistake is that you want to offer a valuation to investors. Many startups fall into this trap. Do not do that. Ask them to offer their fair valuation instead, and compare what different investors offer you. Just how you should have the terms in mind but not offer a termsheet - wait for theirs. Otherwise, you run the real risk of ending up with worse terms than what they might have offered to begin with.

Of course, valuation is not the only criteria for selecting investors, and you may chose to go with an investor who offered you a lower valuation but brought more benefits (deeper domain expertise, better connected, better lead, etc). Same concept applies to liquidation preference, voting rights, etc.

Factors that affect your valuation at this early stage include your and your co-founders past track record, team composition, project stage, current traction, current sales, future expectations/projections (remember, they are looking for unicorns so if you project a 2-3x return for them you are out), ability to execute your idea, good chemistry, whether some similar project recently raised an obscene amount or showed great success (VCs love to jump on the bandwagon), mood of the VC, and alignment of the stars.

$2m is also an amount that could conceivably be raised from angels and/or via convertible notes. You would need a strong and well-connected lead investor for this though. And it's unlikely that you can raise so much on a capless note, so the discussion about pre-money valuation will just turn into an equivalent discussion about pre-money cap.