Fundraising Tip of the Week

📜 Defining Pre-Money and Post-Money Valuations for Early-Stage Startups

per Carta: A few years ago, most early-stage startups raised capital via convertible notes, a form of debt financing that allows investors to convert a loan into equity. Today, most startups are raising on SAFEs, aka Simple Agreement for Future Equity. 

However, one of the biggest mistakes early-stage founders make is assuming that pre-money and post-money SAFEs are interchangeable. There’s a big difference between the two and has a major impact on the future ownership of a company. 

🍰 Post-Money sets a fixed ownership percentage; Pre-Money does not

Post-money valuations have a straightforward mathematical formula that allows both founders and investors to understand exactly how much equity is being sold:

Investment Amount / Post-Money Valuation = Ownership %

For example, if an investor signs a SAFE for a $1 million investment at a $10 million post-money valuation, they’ll receive a 10% equity stake in the company ($1 Million / $10 Million = 10%).

This amount is fixed and will not change regardless of how many post-money SAFEs a founder signs with other investors. This means founders are the most impacted by dilution; investors don’t dilute each other.

🧐 Pre-Money is unpredictable but slightly more “founder-friendly”

Pre-money valuations can’t be calculated until a priced event, such as a priced financing round or an acquisition.

Once this occurs, all the pre-money SAFEs convert at the same time, with investors receiving an ownership percentage that is affected by other investors in the round. This means founders are less impacted by dilution since investors can dilute each other.

🤝 Founders should work with lead investors to set terms

Unsurprisingly, post-money SAFEs are the commonly preferred option for investors. They provide clarity to all participants in a fundraising round and avoid unintended surprises down the line.

Ultimately the decision to use a post-money or pre-money SAFE should be made between a founder and their lead investors. Setting expectations early can help you close deals faster and get right back to work.

Founder Resources, News, & Events

🔗 Links to Share & Save

• Hustle Fund: 5 Reasons Why Your Pitch Deck Should be Shorter

• Peter Walker (Carta): Advisor Equity Grant Benchmarks by Stage

• TechCrunch: Apply for the TechCrunch Disrupt Startup Battlefield competition by June 10th

Investors You Should Know

✨ Featured Investor of the Week

Each week we highlight an early-stage investor that is actively writing checks to Pre-Series A companies. If you’d like to request a warm introduction, reply to this email or click the “Request Intro” button!

Note: We use a double opt-in system to ensure warm introductions; you will only receive a reply if an investor has accepted your request.