Valuation
Also known as Company Valuation, Startup Valuation, Pre-Money Valuation, Post-Money Valuation
Valuation is the agreed worth of a company at a point in time. In venture, the priced round sets it: pre-money valuation is the company's worth before the new investment, post-money is pre-money plus the round size. Both numbers are typically computed on a fully-diluted share count that includes the option pool.
Formula
Post-Money Valuation = Pre-Money Valuation + Investment Amount- Pre-Money Valuation
- Company's worth before the new round closes
- Investment Amount
- Total new capital raised in the round
- Post-Money Valuation
- Company's worth immediately after the round closes
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. With no convertible instruments 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. Standard market practice 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.
For pre-revenue startups with no comparable transactions, the venture capital method, originally formalized by Bill Sahlman at Harvard Business School, 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 (next-round reference price, employee strike price, any local fair-market-value methodology) 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 carved out pre-money.
| Item | Amount | Note |
|---|---|---|
| Pre-money valuation | $9M | Includes option pool top-up |
| Investment amount | $3M | New money in |
| Post-money valuation | $12M | $9M + $3M |
| Investor ownership | 25% | $3M / $12M |
| Option pool (new) | 10% | Carved out of pre-money |
| Founder dilution | ~32.5% | 25% from new money + 7.5% from pool |
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.
Frequently asked
How is a startup valuation actually set?
For early-stage rounds, valuation is the outcome of a negotiation, not a calculation. Investors triangulate from comparable rounds, the size of the option pool needed, the dilution the round implies, and the target ownership stake. The venture capital method works backward from an exit value at a target IRR, but the negotiated number usually drifts from any model output.
Are Series A valuations comparable across markets?
No. Medians vary materially by geography, sector, and vintage. US Series A medians have historically been higher than European and Asian comparables, and within each region capital-efficient software rounds compress higher than capital-intensive sectors. Look at the latest data from PitchBook, Dealroom, or your regional VC association rather than relying on a static number.
Why does the option pool reduce my pre-money valuation?
In a standard priced round the option pool is sized inside the pre-money capitalization. That dilutes the founders before the new money arrives, not the incoming investors. A 10% pool on a $10M pre-money round can pull effective founder valuation down by roughly $1M.
Pre-money vs post-money SAFE: which valuation does the cap refer to?
A pre-money SAFE caps pre-money valuation, leaving founder dilution unknown until conversion because each new SAFE adds to the share count. A post-money SAFE caps post-money valuation, so each investor knows their exact percentage at signing. For the same dollar cap, the post-money version is more dilutive to founders.