Guide

Priced rounds and term sheets

Valuation vs terms

A higher headline with participating prefs and a fat pool can leave common worse than a lower clean deal.

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A $100M post with clean 1× non-participating preferred is not the same deal as a $120M post with 2× participating preferred and a 20% option pool shuffle. The second can leave common stockholders worse at many exit values.

Terms that rewrite the headline:

  • Liquidation preference multiple and participation (liquidation preferences)
  • Option pool size and pre-money carve-out (priced rounds, option pools)
  • Anti-dilution full ratchet vs weighted average (anti-dilution)
  • Seniority of this series vs prior preferred
  • Promised future grants, bonuses, or insider secondaries that move value

Trade-off

Take the higher headline when preferences stay 1× non-participating, pool size is justified by hiring, and you can grow into the number before the next raise. Take the lower clean deal when the premium requires participating prefs, ratchets, or a valuation you cannot defend in 18 months. A modestly lower valuation with standard terms usually beats a trophy number that sets up a down round.

Sophisticated founders negotiate the package: price, pool, board, prefs. Sophisticated investors sometimes offer a juice valuation to win the deal, then claw back economics in the cert. Read the whole term sheet.

Walking through two leads

You are raising $10M. Lead A offers $50M pre ($60M post → ~16.7% sold) with a 15% post-money pool carved pre-money and 1× non-participating. Lead B offers $40M pre ($50M post → 20% sold) with a 10% post-money pool, same prefs.

Effective economics for existing holders (before SAFE conversion wrinkles):

Lead A: post $60M, pool $9M, effective pre ≈ 50 − 9 = $41M
        existing own 100% − 16.7% − 15% = 68.3% of post
        existing dollar claim on post ≈ 0.683 × 60 ≈ $41M

Lead B: post $50M, pool $5M, effective pre ≈ 40 − 5 = $35M
        existing own 100% − 20% − 10% = 70% of post
        existing dollar claim on post ≈ 0.70 × 50 = $35M

Lead A still wins on paper for existing holders — but only if you can grow into a $60M post. If the business is really a $40M-pre company, Lead A's "win" is a down-round seed. Price the next round you will need, not the press release.

Example

You take Lead A. Eighteen months later you have $4M ARR growing 50%. A Series B investor underwriting 10× ARR suggests ~$40M post — below your last round. You are in flat/down territory despite "winning" Series A. Lead B's lower entry with more runway discipline might have left you raising Series B at a step-up. Valuation is a path, not a trophy.

Signals that a valuation is fake

  • The investor will not show a pro forma cap table with the pool.
  • Preference is 2× or participating "because the valuation is so high."
  • Half the round is a verbal "we'll fill it later" with no second close plan.
  • SAFE caps already sit above the proposed priced pre-money (SAFE math).
  • The only comps cited are the hottest three AI deals of the month, none with your growth rate.

Common mistakes

  • Picking the higher pre-money and ignoring the pool. Effective pre is headline minus pool dollars.
  • Accepting dirty prefs as the price of a trophy number.
  • Not modeling the next round. Today's win is tomorrow's down round.

Check yourself

Lead A: $60M post, 15% pool. Lead B: $50M post, 10% pool. About what is existing holders' dollar claim on each post?

About $41M on A (68.3% × $60M) vs $35M on B (70% × $50M). A wins on paper if you can grow into $60M.

When should you take the lower clean deal?

When the premium requires participating prefs, ratchets, or a number you cannot defend in 18 months.

Key takeaways

  • Headline post-money without prefs, pool, and ratchets is incomplete.
  • Effective pre-money ≈ headline pre − (post × pool%).
  • Price the next round backward; a trophy today is a down round tomorrow.

Further learning

Next, read the whole term sheet.

How startup valuation really works

Early valuations as negotiated ownership, later ones as revenue multiples — and why the headline number can lie.

Term sheets: an overview

The anatomy of a VC term sheet — economic vs control terms, what is binding, and what to negotiate first.

Option pools

Reserved equity for hiring — size it from a plan, watch the pre-money shuffle, and refresh before the tank is empty.