I think people often structure the investment as a convertible loan specifically to avoid this question. The conversion part is that the loan converts to equity (with a discount) based on the valuation set during your series A. This way you don't have to come up with a make-believe valuation right now.

If you don't ever get to series A your company will either have to pay off the loan with interest or go out of business.

CRV offers this as part of their quickstart program and is very open about the terms. It's a good place to find out more.

http://www.crv.com/quickstart

"A standard interest bearing loan will be made to a corporation, which we will help you establish if you do not already have one in place. CRV will not seek a personal guarantee and will not hold you personally responsible for repaying the loan.

The loan converts into equity only if and when your company closes its next round of funding (typically a Series A round). If the company successfully raises its next round, in exchange for sharing the risk with the entrepreneur, CRV receives a discount on the conversion price when the loan is rolled into that next round. The discount will be a maximum of 25% (determined ratably at five percent per month, depending on how long it takes to close the financing, up to the maximum) off of the per share price. "

Valuation is arbitrary before there are financial or other metrics with which to reason about comparables.

How much can you ask for with a straight face? How much do you need the money? (What's your 'BATNA'?)

Be honest about the prospects of losing all the money, and your hopes for making a lot. (With friends and family, be especially clear it could all be lost without recourse.)

If you trust your profit projections -- or at least the relative likelihood of different good, middle, bad scenarios -- you can do a discounted cash flow analysis, weighted by the different outcomes. Of course, it's all fantasy, but it's a way of deriving a bottom-line valuation from some numerical assumptions, and then you can argue about the assumptions.

You certainly can have contractual terms which give them first claim on dividends up to some rate, or where their returns are capped at some cumulative return, or where you have buyback rights at predetermined prices, and so forth. I think these are more likely when the outcomes are better understood -- for example when entrepreneur and investors are known qualities in a predictable market.

With something highly speculative, a vanilla "you have X% of the venture, boom or bust" may be safer, and less likely to make things weird if you later pursue more institutional investments.

Also: be sure to understand 'accredited investor' rules (or the equivalent in your jurisdiction, if not in the US). Don't skimp on good legal advice.

1. Build the idea and take it as far as you can without any outside investors.

2. Once you're out of money and your business is more mature, you will have a better idea how much your company is worth.

3. You can now negotiate with investors.

Advice: Don't worry too much about the finances. Focus on building a great product first. =)