Valuation and funding rounds

Valuation is what makes many founders nervous — what is the company really worth before it makes money? The truth is that early-stage valuation is more negotiation than fact. This lesson gives you the concepts you need to understand the numbers and defend your interests.

How early-stage companies are valued

A mature company can be valued from earnings and cash flow. An early-stage company rarely has enough of either, so the valuation rests more on potential and negotiation than on a spreadsheet. In practice the price is influenced by factors such as:

• How strong the team and the evidence (traction) are.
• How large the market is perceived to be.
• What comparable companies have recently been valued at.
• How much capital you raise, and how much ownership you are willing to give up.
• Quite simply supply and demand: how many investors are competing to take part.

There are methods that try to put a number on this, but in the early phase they are rough estimates. Do not cling too hard to one right number — think instead about which valuation gives a healthy distribution of ownership after the round.

Pre-money and post-money

Two concepts are absolutely fundamental, and they are often confused:

• Pre-money is what the company is valued at before the new capital comes in.
• Post-money is pre-money plus the new capital.

The stake the investor gets is calculated from post-money: the amount they put in, divided by the post-money value. A simple example without rates: if an investor puts in a sum equal to a quarter of the post-money value, they get a quarter of the company, and the existing owners keep three quarters. The difference between pre- and post-money can shift significant ownership, so always be clear about which of the two a figure refers to.

Convertible loans and SAFE-like instruments

At a very early stage it is often difficult — and expensive — to agree on a valuation. Then instruments that postpone the pricing to a later round are often used:

• Convertible loan: the investor lends the company money that is later converted into shares, typically at the next share issue, often with a discount as a reward for early risk.
• SAFE-like agreements: a simpler variant where the investor pays now for a right to shares later, without it formally being a loan.

The advantage is that you avoid negotiating a valuation while you are at your weakest. The drawback is that the dilution happens later and can be larger than it feels in the moment — the money only counts once the instrument converts. Use such agreements deliberately, and always work out how they play out when they turn into shares.

Cap table and dilution over several rounds

A cap table is the overview of who owns how many shares. Each funding round adds new owners, and the existing ones are diluted.

The key is to understand that dilution happens repeatedly. The founder who owns everything at the start will, after several rounds — angels, seed, venture — hold a far smaller share. That is not in itself a problem: a small share of a large company can be worth far more than the whole of the small company was. But you should always calculate forward: What does the cap table look like after another two or three rounds? Do the founders keep enough ownership and motivation to drive the company all the way?

An example

A founder in Stavanger first raises a convertible loan from an angel, then a share issue from a seed fund. When the loan converts in the new round, she discovers that the total dilution is larger than she had imagined, because she had only calculated on the seed round in isolation. The lesson: always model all the instruments together, not one round at a time.

Do this now

Set up a simple cap table in a spreadsheet: list today's owners and their stakes. Then add a hypothetical share issue where an investor buys a share of the company, and see how all the existing stakes shrink. Do it once more with a second round. This exercise makes dilution concrete — and prepares you for conversations with investors. If you need to understand the legal side, seek advice from a lawyer with experience in share issues.