Valuation step-up
A valuation step-up is the ratio between one round's valuation and the next one's. A round priced at three times the previous valuation is a 3x step-up. It is a ratio, not a dollar figure, and it is only meaningful once you say which two valuations you are comparing.
What the ratio decides is how much of the company the next cheque costs you.
The starting point
Take a company that has just closed a seed round at a $10,000,000 post-money valuation, with the founders holding 64.8% after their SAFEs converted and the round closed.
The next round raises $6,000,000. The only thing that changes between the two cases below is the valuation.
Two step-ups, same cheque
| Next round post-money | Step-up | Investor takes | Founders keep |
|---|---|---|---|
| $30,000,000 | 3.0x | 20.0% | 51.84% |
| $15,000,000 | 1.5x | 40.0% | 38.88% |
The arithmetic is one division and one multiplication each time. At a $30,000,000 post-money, $6,000,000 buys 20.0%, so the founders keep 64.8% × 0.80. At $15,000,000, the same $6,000,000 buys 40.0%, so they keep 64.8% × 0.60.
12.96 points, decided by the ratio and not by the amount raised.
What this does and does not tell you
The step-up sets the price of the money. It says nothing about whether the money was worth raising, what the company is worth, or whether either valuation was reasonable. Those are separate questions and this arithmetic does not answer them.
It also compares exactly two rounds. Promythia models this round and the round after it, so the step-up here is the ratio between those two and not a projection across a series.
What to check in your own documents
- State which two valuations you are comparing, and whether each is pre-money or post-money. A step-up computed from a pre-money against a post-money is not a step-up, it is a mistake.
- Work out the next round's dilution before you fix this round's valuation. A high valuation now sets the bar the next round has to clear.
- Compute the founder percentage, not the multiple. The multiple is the headline; the percentage is the outcome.
Run it on your own numbers
Comparing two step-ups by hand is two divisions. Doing it against your real cap table, with your instruments converting into the first round and the second round landing on top, is what the model is for.
Promythia projects this round and the next one on the cap table you enter. Create a free account and run both.
Promythia offers market and strategy guidance. It is not legal or financial advice.