Two rounds out, not one
The round in front of you is not the round that settles your ownership. It is the first of at least two, and the second one does more of the work than the first.
Here are two paths from the same starting point. One has the better headline valuation today and leaves the founders with less later.
The starting point
Founders hold 8,100,000 shares. Three post-money SAFEs totalling $850,000 have converted, taking the count to 10,000,000 and the founders to 81.0%.
Both paths raise the same money: $2,000,000 now, then $6,000,000 next. The only difference is the valuation each round is done at.
Path A: a $10,000,000 seed, then a 3x step-up
| Founder shares | Total | Founders own | |
|---|---|---|---|
| After the SAFEs | 8,100,000 | 10,000,000 | 81.000% |
| Seed, $2,000,000 at $10,000,000 post | 8,100,000 | 12,500,000 | 64.800% |
| Next, $6,000,000 at $30,000,000 post | 8,100,000 | 15,625,000 | 51.840% |
The seed investor takes 20.0% at $0.80 per share. The next investor takes 20.0% at $1.92.
Path B: a $12,000,000 seed, then a 2x step-up
| Founder shares | Total | Founders own | |
|---|---|---|---|
| After the SAFEs | 8,100,000 | 10,000,000 | 81.000% |
| Seed, $2,000,000 at $12,000,000 post | 8,100,000 | 12,000,000 | 67.500% |
| Next, $6,000,000 at $24,000,000 post | 8,100,000 | 16,000,000 | 50.625% |
The seed investor takes 16.7% at $1.00 per share. The next investor takes 25.0% at $1.50.
The comparison
| After the seed | Two rounds out | |
|---|---|---|
| Path A, $10,000,000 seed | 64.800% | 51.840% |
| Path B, $12,000,000 seed | 67.500% | 50.625% |
Path B wins the round in front of you by 2.7 points and loses the position by 1.215 points.
The seed valuation was 20% higher and the founders ended lower, because the next round is priced against the seed rather than in isolation. A 3x step-up off $10,000,000 lands at $30,000,000. A 2x step-up off $12,000,000 lands at $24,000,000, and the same $6,000,000 buys more of the company there.
What this does and does not show
These are two scenarios, not a prediction. Nothing here says a higher seed valuation causes a lower step-up. What it shows is that the two paths cannot be compared at the seed, because the number that separates them appears one round later.
It does not tell you which path to take. That depends on what the next round will actually price at, which nobody knows in advance. The point is narrower and more useful: run both.
It stops at two rounds because that is as far as the arithmetic is worth trusting. Each additional round multiplies an assumption by another assumption.
What to check before you sign this round
- Model the round after this one, with the same care. If you only model one, you are comparing paths on the number that separates them least.
- Ask what the next round has to be priced at for this deal to be the better one. That is a single calculation and it reframes the negotiation.
- Watch the step-up, not the valuation. A seed valuation is only worth what the next round does with it.
- Do it before you agree the valuation, not after. Afterwards it is a report rather than a decision.
Run it on your own numbers
Both paths above are four divisions each, and they still take longer to set up than most people will do by hand while a term sheet sits open.
Promythia models this round and the round after it on the cap table you enter, so you can compare two paths rather than one. Create a free account and run both.
Promythia offers market and strategy guidance. It is not legal or financial advice.