Your investors have many investment options. Your start up company, by its very nature is high risk, after all, it is a start up company. Therefore, it must offer investors a very high potential return on their investment (ROI). If your price per share and your company's financial projections indicate a moderate ROI, the investor would be much wiser to invest in something far less risky. Now, you might think “I'm the one putting everything I have into this company; all the investor is putting in is some cash; they don't deserve that much of a return.” That is a fine attitude to have only if you don't want investors .

The price per share will be the subject of major discussion between you and your lead investor, but right now all you are doing is planning your company. So, you need to enter a price per share that is at least realistic; that is, it is in the ballpark of a price per share that a sane investor might agree to. Let's talk about how to find that price. Let's say you have decided to need to raise $500,000 (as determined by careful analysis of your cash flow statement) during Series A. In order to calculate a reasonable price per share, we must make some assumptions about your assumptions, e.g., let's assume

1. You created 1,000,000 shares during your founders' round.
2. You earmarked 1,000,000 shares for your option pool. (Remember, these are ones you are just earmarking during your planning stage; when you actually start the company, you will likely have a series of option pools that will eventually total 1,000,000)
3. You plan to be acquired in 5 years for $6,000,000. (The 5 years comes from your knowledge of your industry, the merger and acquisition market, and your expected growth. The $6,000,000 comes from Offtoa, based on industry-specific multiples of key numbers extracted from your 5th year pro forma income statement. You can learn more about determining future valuation by reading the blog post Determining Future Valuation.
4. You do not expect any additional investments after Series A.
5. You know that the genre of investors you will be courting expect internal rates of return (IRR) of approximately 40%. (You can find the kinds of returns achieved by venture capital funds by visiting many sites, for example https://www.cambridgeassociates.com/pdf/Venture%20Capital%20Index.pdf).
   

Let's try various prices per share and see what kinds of IRRs the investors would achieve:

1. Let's try a price per share of $1.00. Then the investors would be purchasing 500,000 shares (i.e., $500,000/$1.00). In 5 years, assuming all our assumptions become reality, the company will be acquired for $6,000,000. There are 2,500,000 shares. The investors own 500,000, or 20% of the total. Their share of the proceeds would be 20% of $6,000,000, or $1,500,000. The IRR for a $500,000 investment returning $1,500,000 in 5 years is 25%, that is, $1,500,000 = $500,000 ˜“ (1.25)⁵. An IRR of 25% is a bit low for most sophisticated investors.
2. Let's try a price per share of $.50. Then the investors would be purchasing 1,000,000 shares (i.e., $500,000/$.50). In 5 years, assuming all our assumptions become reality, the company will be acquired for $6,000,000. There are 3,000,000 shares. The investors own 1,000,000, or one third of the total. Their share of the proceeds would be one third of $6,000,000, or $2,000,000. The IRR for a $500,000 investment returning $2,000,000 in 5 years is 32%, that is, $2,000,000 = $500,000 ˜“ (1.32)⁵. An IRR of 32% is still low for most sophisticated investors, but not out of the question.
3. Let's try a price per share of $.3125. Then the investors would be purchasing 1,600,000 shares (i.e., $500,000/$.3125). In 5 years, assuming all our assumptions become reality, the company will be acquired for $6,000,000. There are 3,600,000 shares. The investors own 1,600,000, or 44.4% of the total. Their share of the proceeds would be 44.4% of $6,000,000, or $2,666,667. The IRR for a $500,000 investment returning $2,666,667 in 5 years is 40%, that is, $2,666,667 = $500,000 ˜“ (1.4)⁵. An IRR of 40% might be acceptable to some sophisticated investors.

Notice that contrary to what many novice entrepreneurs think, investors are not motivated by control! They might drive you toward a 44% ownership stake for their $500,000 investment, but it is based solely on them achieving their desired returns, not on control. They do not want to own your company! They want a great return on their investment.

Also see the blog post, Planning Investment Round Pricing for Startups

Related Questions:

How do I create an investment round?

How do I change the price per share for an investment round?