Startup valuation basics

Early-stage valuation is not a calculation. There are no cash flows to discount and no comparables that mean much, so the number is set by what the round needs to be, how much dilution is normal at the stage, and how much competition there is for the deal. Working backwards from those three gets you closer than any model.

How the number is actually arrived at

A round is usually 10-25% of the company. So a ₹8 crore raise at a standard 20% dilution implies a ₹40 crore post-money valuation, and the negotiation is about moving that percentage. This is why round size and valuation are not independent decisions: change one and the other moves with it.

Pre-money, post-money, and the option pool

• Post-money = pre-money + the amount raised. A ₹40 crore pre-money with an ₹8 crore round is a ₹48 crore post-money, and your ownership is calculated on the post.
• The option pool is usually created out of the pre-money — meaning existing shareholders, which is you, pay for all of it. A 10% pool on a ₹40 crore pre-money is ₹4 crore of dilution that does not look like dilution in the headline number.
• Ask for the fully-diluted cap table after the round, including the pool. That single table answers what the headline valuation obscures.

Terms that cost more than the price

• Liquidation preference. A 1x non-participating preference is standard and fine. Participating preferences and multiples above 1x mean the investor takes their money back and then shares the rest — at modest exits, that can be most of the outcome.
• Anti-dilution. Broad-based weighted average is normal. Full ratchet transfers the entire cost of a down round to the founders and common holders.
• Board composition and reserved matters. Who has to agree before you can hire, borrow, or sell the company.
• Drag-along and tag-along, which decide who can force a sale, and on what terms.

Convertible instruments

At pre-seed, price is often deferred with a convertible note or a SAFE-style instrument, converting at the next priced round with a discount and usually a cap. The cap is the real valuation negotiation — it sets the worst price the investor will pay. In India, note that a SAFE is not a native instrument under the Companies Act; the common domestic equivalent is a CCPS or a convertible note issued under the relevant RBI and Companies Act provisions, and the structure is worth a lawyer's hour before you sign, not after.

This page is general information, not legal, tax or financial advice. Term sheets are binding in ways that are not obvious from reading them; get an experienced startup lawyer before you sign one.