One of the main conversations that founders have with each other is about fundraising and it always come down pretty much to the same questions:
- How much are you raising?
- What’s your valuation?
- What’s your dilution?
And then entrepreneurs start to have an opinion about the valuation, the dilution and the money. They compare with peers, try to assess if the valuation and dilution are « fair », and many more comparisons that can end up being inaccurate and disheartening.
At the end of the article, you can download our simple model to calculate dilution (we’ll provide another one, more complex later).
If people buy a share in the stock market, most of the time, they tell to others « I bought it at price X and today it trades at price Y, I have a current return of Z%. »
Although the principle is the same for startups, most founders speak about the valuation of the company (market cap in the stock market) and about the dilution or percentage they have. From that point, comes some frustration because founders have the impression they gave « too much » to their investor(s) or that investor(s) do(es) not value their business at the right price.
We’ll discuss in this article how dilution and valuation are calculated but also what founders should spend more attention to.
The first big problem that people have in Belgium is that they look at valuation, amount of money raised in the other countries (a.k.a US,…) and complain about the dilution in our country.
Valuation & dilution
While raising funding, you will normally be confronted with two kinds of valuation: Pre-Money and Post-Money valuation. You need to be careful when you discuss with your investors to be sure you both speak about the same kind of valuation.
The Pre-Money valuation is the value of the company before the investment has been made. It is then the total value founder(s) and his/their employee(s) created until the investment.
The Post-Money valuation is the value of the company after the investment has been made in the company. It’s on this valuation that dilution is calculated.
Pre-Money Valuation is 400k€
Investment is 200k€
Post-Money Valuation is 600k€ (400k€+200k€). The dilution (or % ownership of the new investors) is 33,33% (200/600).