Valuation Calculation

Founder: $3M pre-money → $4M post-money, ownership at 75%.

VC: Adjusts for 20% pre-funding option pool, “true” pre-money is $2.4M, ownership at 60%.

Option Pool

Founder: Assumes minimal dilution, unaware of VC’s pre-funding requirement.

VC: Requires a 15–20% option pool pre-funding, lowering founder equity.

Liquidation Preferences

Founder: Expects investors to get their money back first in a sale.

VC: Adds 2x–3x participating preferred, reducing founder payout on smaller exits.

Preferred Stock Terms

Founder: May misunderstand or overlook participating preferred terms.

VC: Uses these terms to protect downside and boost returns on smaller exits.

Negotiation Strategy

Founder: Accepts terms quickly due to urgency or lack of knowledge.

VC: Structures terms to maximize returns while appearing founder-friendly.

Pre-Money vs Post-Money

Founder: Sees valuation as pre-money + capital raised.

VC: Adjusts pre-money valuation after factoring in option pool.

Valuation Anchoring

Founder: Focuses on high headline valuation to minimize dilution.

VC: Frames discussions around ownership percentages and post-money equity.

Revenue Multiples

Founder: Uses optimistic projections or market comparables.

VC: Applies conservative revenue multiples based on sector benchmarks.

Future Dilution Considerations

Founder: Overlooks dilution from future funding rounds.

VC: Models dilution across rounds to maintain target ownership.

Cap Table Implications

Founder: Doesn’t assess long-term cap table dynamics beyond the current round.

VC: Models impact on employee options, pro rata rights, and founder equity. Learn the math. Master the terms. Protect your stake.