How do you determine the value of a company for buyout purposes?

Question

I am starting a small company and intend to fund the startup with venture capital. I am prepared to offer around 40% ownership to the investing venture capital firm. We plan to buy back the 40% after 3 years. At that time, what factors are used to determine the value of their 40% of the company? Is there a formula to estimate the value? Am I at the mercy of the investors? What type of returns do venture capital firms expect?

Answer 1

Roughly 7X the net income on the company