An investor wants 20%. What is that worth?
Funds tend to talk in percentages. Founders tend to think in valuations. The two are the same conversation, and the conversion takes one division.
A target percentage is a complete statement about your dilution and an incomplete statement about your valuation. It tells you exactly what you give up. It tells you nothing about what the company is worth until you also fix the cheque.
The conversion
post-money = cheque ÷ percentage
pre-money = post-money − cheque
That is it. If someone wants 20% and is writing $2,000,000:
$2,000,000 ÷ 0.20 = $10,000,000 post-money
$10,000,000 − $2,000,000 = $8,000,000 pre-money
Why the percentage is the part that binds you
Start with the same cap table used across these pages: 8,100,000 founder shares and a 900,000 option pool, 9,000,000 fully diluted.
Hold the percentage at 20% and vary the cheque.
| Cheque | Target | Post-money | Pre-money | Founders keep |
|---|---|---|---|---|
| $1,000,000 | 20% | $5,000,000 | $4,000,000 | 72.0% |
| $2,000,000 | 20% | $10,000,000 | $8,000,000 | 72.0% |
| $3,000,000 | 20% | $15,000,000 | $12,000,000 | 72.0% |
The valuation triples across those rows. Your ownership does not move at all.
Once the percentage is agreed, your dilution is settled and the valuation is bookkeeping on the size of the cheque. That is worth knowing before you spend a negotiation on the valuation and treat the percentage as the thing that follows from it. It is the other way round.
The complication: a pool ask attached to the same 20%
Take the $2,000,000 at an $8,000,000 pre-money, and now suppose the term sheet also requires the option pool to be enlarged by 1,000,000 shares out of the pre-money.
| Founders | Pool | Investor | |
|---|---|---|---|
| 20%, no pool ask | 72.0% | 8.0% | 20.0% |
| 20%, pool topped up pre-money | 64.8% | 15.2% | 20.0% |
The investor holds 20% either way. The founders moved 7.2 points.
So work out what that $8,000,000 pre-money is worth once part of it goes to creating pool shares. The top-up is 1,000,000 shares, which is 8.0% of the 12,500,000 post-round count, and 8.0% of the $10,000,000 post-money is $800,000.
$8,000,000 − $800,000 = $7,200,000 effective pre-money
That is the number to negotiate against. The offer was quoted at $8,000,000 and prices like $7,200,000, because $800,000 of it was consumed creating shares that did not exist when the valuation was named. Change the size of the top-up and that figure changes with it, so compute it on the terms in front of you.
What to check when someone quotes you a percentage
- Ask for the cheque in the same sentence. A percentage without an amount is not yet an offer you can price.
- Do the division before you respond. Cheque divided by percentage is the post-money they are proposing, whether or not they said a valuation out loud.
- Ask whether a pool change is part of it, and whether it sits in the pre-money. If it does, the percentage you were quoted is not the whole cost.
- Convert your counter back into a percentage. If you argue for a higher valuation and concede a bigger pool, check whether you moved your own number at all.
Run it on your own numbers
The conversion is one division. Doing it against your real cap table, with instruments already outstanding and a pool question attached, is where it stops being a mental calculation.
Promythia takes the round as you describe it and shows you the ownership that results. Create a free account and price the offer you actually have.
Promythia offers market and strategy guidance. It is not legal or financial advice.