Startup valuations: a price agreed with one buyer, not a value
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A startup valuation is not an appraisal. It is the price one investor agreed to pay for a share of a company at a moment, negotiated against what that investor needs to own and what the founders will accept, and it becomes a headline only afterwards. That is why the arithmetic is simple and the argument is not. This page sets out what the numbers mean, where the money actually goes, and which of them founders most often misread. It does not value a company and it is not investment advice.
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Startup company valuation before there is revenue to value
With no earnings and little revenue there is nothing for a multiple to sit on, so a round is priced on the size of the raise and the share the investor requires. Work backwards from those two and the valuation falls out: an investor putting in a given sum for a given percentage has set the number, whatever anybody calls it. Everything else in the conversation, the market size, the team, the traction, is an argument about what that percentage should be.
Pre money valuation and post money valuation, and what the difference costs the founders
Pre money is the agreed value of the company before the new money arrives; post money is that figure plus the money. Investors and founders often quote different ones without noticing, and the gap is exactly the size of the round, which on an early round is a large share of everything. Any term sheet that is ambiguous about which one is meant is ambiguous about how much of the company is being sold, and it is worth settling in writing before anything else is negotiated.
How to calculate startup valuation from a round rather than from earnings
Take the investment and divide it by the share the investor is receiving to get the post money figure, then subtract the investment to get pre money. Then do the part founders skip, which is running the same arithmetic on the fully diluted share count including the option pool, any convertible instruments and any warrants. The number that matters to a founder is what percentage they hold afterwards, and that is decided by the denominator rather than by the headline.
Where the option pool goes, and why it is a price negotiation in disguise
If a new or enlarged option pool is created before the round, it dilutes the existing holders alone and effectively lowers the price the investor is paying; created afterwards, it dilutes everybody. Term sheets frequently ask for the first without saying so. It is a legitimate thing to ask for and a legitimate thing to negotiate, and it is invisible unless somebody works the cap table both ways before signing.
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Startup valuations: common questions
What is the difference between pre money vs post money valuation?
The money itself. Post money is pre money plus the investment, so quoting pre money vs post money as though they were interchangeable understates or overstates the founders' remaining share by exactly the size of the round. On an early round that can be a fifth of the company.
Is pre vs post money valuation the same argument on a convertible note?
It becomes a sharper one. A note or a simple agreement converts at a discount or a cap into a later round, and whether the conversion is calculated on the pre money or post money share count decides how much of the dilution the earlier investors carry and how much the founders do. The document says which; it is worth reading the clause rather than the summary.
Does pre and post money valuation change what an option pool costs?
Yes, and this is where the real negotiation often hides. A pool created pre money comes out of the founders' share alone; created post money it comes out of everybody's. The same headline valuation therefore leaves founders with materially different holdings depending on one line in the term sheet.
How do startup valuations differ from valuing a business to sell it?
A sale is priced on what the business produces and what a buyer will pay for that today. A round is priced on what an investor needs to own for a fund to work at all. The first is an argument about evidence and the second is an argument about ownership, which is why the same company can carry two very different numbers in the same month without either being wrong.
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