Making venture math easier
I recently launched a preferred financing calculations tool for you. It’s an online spreadsheet for you to enter some basic capitalization information, a target pre-money valuation, and a target investment amount. It then shows you the results for your cap table.
Some inherent things about venture math that are embodied here but that you might not know: the price per share is simply:
(pre-money valuation in dollars) / (fully diluted pre-money capitalization in shares)
Get it? Dollars per share. You’ll never forget it.
The number of shares any investor receives is:
(dollars invested) / (dollars per share)
The reason that these are the correct calculations and not
money in / valuation
is that the investor money goes into the company’s checking account and the company issues new shares to the investor. As a founder, you’re not selling your personal shares to the investor. If you did, after the deal, you’d have money and your startup would still have no cash in its account to hire people or pay for servers. (That would be a really crappy investment decision by the investor.)
So venture math means that the investment is added to the valuation of the company. That’s why you sometimes hear the term post-money valuation – it means the value of the company after the deal, which is equal to
pre-money valuation + new investment dollars
It’s like putting two pizzas on a table. If it’s the good pizza from Brooklyn Pizza around the corner from me, the value of those pizzas is about $35. If you then throw a $20 bill on top, the post-money value of what’s on the table is $55. The same is true for your company.
The price per share DOES NOT change based on how much an investor puts in. This is why formulations, like you see on Shark Tank of “$500,000 for 20% of the company” are non-standard in the venture world. How do you readily compare that to “$350,000 for 15% of the company?” The answer is that you have to do the algebra to work out the implied pre-money valuation so you can compare apples to apples. In this example, the two deals are really saying “$500k at a $2m pre-money” and “$350k at a $1.59m pre-money.” Those are numbers you can more readily compare. So: always pitch your needs in this format, and always convert each proposal you receive into this format.