Valuation

In depth

In a priced round, the valuation is fixed by three numbers on the term sheet: the price per share, the number of shares already outstanding on a fully-diluted basis, and the option pool target. Cooley spells this out: when no convertible instruments are outstanding, price per share equals pre-money valuation divided by fully-diluted shares before the round. Add the new investment and you get post-money.

The "fully-diluted" qualifier matters. The NVCA model term sheet counts every outstanding option, every unissued option in the post-close pool, every SAFE, and every convertible note as if it were already common stock. Excluding any of these inflates the headline valuation without changing the economic outcome, which is why the model documents push for full inclusion.

For pre-revenue startups with no comparable transactions, the venture capital method, originally published by Bill Sahlman at HBS, works backward from a hypothetical exit. Pick an exit multiple (revenue or EBITDA), project the financials, apply the multiple to get terminal value, discount back at the target IRR. The output anchors a negotiation; it rarely lands as the final number.

Why it matters

Valuation drives dilution, board composition, and the price of every share issued thereafter. A founder who pushes pre-money valuation up by 25% loses commensurately less equity at signing, but every downstream signal (Series A reference price, employee strike price, 409A) anchors on it. Aggressive valuations create down-round risk: when the next round comes in below the prior post-money, anti-dilution clauses trigger and the prior round's investors get re-priced.

Worked example

A startup raises $3M on a $9M pre-money valuation with a 10% post-close option pool, structured per the NVCA model.

The headline is "$3M at $9M pre" but the founders actually drop from 100% to about 67.5%, not the 75% the simple math suggests, because the option pool top-up came from their share of the cap table.