Priced rounds and term sheets
Ownership-backed valuation
At seed and Series A, price falls out of cash needed and the slice the lead must own — not a DCF of the code.
At pre-seed and seed, and often at Series A, the negotiation is rarely "what is this company worth in a DCF." It is: how much cash do you need, how much dilution will founders take, how much ownership does the lead need for fund math, and what competing term sheets exist.
post-money ≈ round size / target investor ownership
pre-money ≈ post-money − round sizeA $3M raise for ~20% implies ~$15M post and ~$12M pre — regardless of whether anyone "appraised" the code or the brand.
The big idea
Selling a house by the room is the picture. You need $3M of work done; the buyer wants 20% of the house; the implied "value" is $15M. The analogy breaks because later you will sell more rooms, and terms can rewrite who owns the kitchen.
Venture funds have ownership targets because of fund economics and the power law: a seed fund that owns 2% of a unicorn rarely returns the fund; one that owns 15–20% of a breakout might. That structural need collides with founder dilution budgets. The market clears somewhere in between, depending on leverage.
Walking through a $3M seed
You need roughly $3M to get to a Series A-ready metric (say $1M ARR or clear product-market fit evidence). A seed lead typically wants 15–25% of the company. At 20%:
post-money = 3M / 0.20 = $15M
pre-money = $12MRaise $4M at the same 20% and the post jumps to $20M — you did not suddenly become more valuable; you sold the same slice for a bigger check, which only makes sense if you can deploy the extra capital usefully.
What actually moves the number
| Driver | How it shows up |
|---|---|
| Team | Prior exits, domain depth, ability to recruit — especially pre-traction |
| Traction | Revenue, growth rate, retention, usage; proof someone pays |
| Market | TAM narrative investors already believe; category heat |
| Competition for the deal | Multiple serious term sheets compress closing time and raise price |
| Round dynamics | Hot demo days, scarcity of allocation, FOMO |
None of these produce a unique number. Two equally "good" seed companies can clear at $8M and $25M post in the same month because one ran a tight process with three leads and the other took the first offer. Process is part of price — see running a fundraise.
Convertible instruments hide the sticker. A post-money SAFE with a $15M cap is economically close to agreeing that the next priced round will give SAFE holders ownership as if the company were worth $15M post (subject to stacking). Caps are valuations in disguise.
Common mistakes
- Treating a bigger check at the same % as a better company. It is a bigger sale of the same slice.
- Skipping process. One offer is not a market price.
- Forgetting SAFE caps already set a floor that converting holders will use.
Check yourself
You raise $3M for 20%. What are post-money and pre-money?
Post $15M, pre $12M. $3M / 0.20 = $15M; $15M − $3M = $12M.
Why do seed leads often need 15–20% rather than 2%?
Fund math: a small stake in even a huge outcome may not return the fund.
Key takeaways
- Early price ≈ cash needed ÷ ownership the lead must own.
- Team, traction, market, and competitive tension move the number more than spreadsheets.
- SAFE caps are valuations in disguise.
Further learning
Next, revenue multiples — the language at Series B and beyond.
Related
How startup valuation really works
Early valuations as negotiated ownership, later ones as revenue multiples — and why the headline number can lie.
How venture capital works
LPs, GPs, fund structure, management fees, carry and the returns VCs need.
Priced rounds
Preferred stock at a negotiated price — pre- and post-money, share math, the pool shuffle and the closing binder.