Understanding Valuations

Early-stage valuation is a negotiated number, not a calculated one. There is usually no cash flow to discount and no comparable public multiple that applies cleanly. In practice the number falls out of how much capital the company needs, how much ownership the founders will part with, and how much competitive interest exists in the round.

Pre-money valuation is the agreed value before new capital. Post-money is pre-money plus the amount raised. Ownership sold is the amount raised divided by post-money.

A high valuation is not a measure of quality. It raises the bar the company must clear at the next round, and a company that raises at a price it cannot grow into faces a difficult down round later.