Startup valuation and dilution are two things every founder needs to understand deeply. They don’t just affect how much money you raise, they shape your ownership, control, and long-term upside.

Let’s start with valuation. For startups, especially early-stage, this isn’t about revenue or profit multiples because you probably don’t have much of either yet. Instead, your valuation is based on a mix of things: how big the market is, how fast you can grow, the strength of your team, your traction so far, and what similar startups have been valued at recently. 

There are a few common ways investors approach valuation:

 

• • The Venture capital method looks at what your company could be worth in the future ( usually at exit), then discounts it back to what it’s worth today based on risk and return expectations.

• • The Comparable company method looks at valuations of other startups based on revenue multiples, user base, or similar benchmarks. 

• • The Berkus method assigns value to different aspects of the business like product, team, and execution and adds them up.

• • The Scorecard Method compares your startup to others in your region and sector, adjusting up or down based on team strength, traction, and market size.

All of these are part science, part gut-feel. Don’t get too obsessed with what’s fair, focus on what’s strategic and sustainable for your stage. 

Now, let’s talk about dilution. Every time you raise money and issue new shares, your ownership percentage goes down. That’s dilution and it’s normal. What matters is how much you’re giving up vs what you’re getting in return. If you raise $1m at a $4m pre-money valuation, you’ve given up 20% of your company. Raise that same $1m at an $8m pre-money valuation now you’re only diluted 11.1%.

Pre-money Valuation refers to how much a company is worth before the new investment is added. This valuation is usually based on the startup’s traction, team, product, market size, and growth potential. Post-money valuation, on the other hand, is the company’s value after the investment has been made. It’s simply the sum of the pre-money valuation and the new investment amount. This distinction matters because it directly impacts how much ownership you’re giving up. A higher pre-money valuation means less dilution for the founders. But it also has to be realistic overvaluing your startup can scare away good investors or cause problems in future rounds. On the flip side, investors want to make sure they’re entering at a fair valuation that gives them enough upside in case your startup takes off.

So yes, valuation directly impacts dilution. A higher valuation means you keep more equity. But don’t chase the highest number if it comes with bad terms or unrealistic expectations. What you want is a healthy valuation, good terms, and smart investors who bring more than just cash. And be careful with things like liquidation preferences, anti-dilution clauses, and participating preferred shares; these can seriously affect your future payout even if the headline valuation looks good.

You’re building long-term value. Don’t just raise money, understand how the deal shapes your future. Stay smart about valuation,manage dilution intentionally, and always keep your equity aligned with growth. That’s how you protect your upside and keep control of your company’s destiny.

The concepts of liquidation preferences, anti-dilution clauses, and participating preferred shares will be explained in another article.

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