How a round is priced, and what dilution really costs

Founders often ask how a valuation is calculated. At this end of the market it mostly is not calculated — it is negotiated, then justified afterwards. Discounted cash flow on a company with three years of history and one product is arithmetic dressed as evidence. What actually sets the price is what a comparable company raised recently, how fast you are growing, how good the margin is, and how many investors are competing for the round.

What is arithmetic is what the price costs you. That part is worth being exact about.

1. Pre-money, post-money, and the only formula you need

Post-money is pre-money plus the round. The new investor's stake is the round divided by the post-money. Raise ₹5 Crore at a ₹20 Crore pre-money: post-money is ₹25 Crore, and the investor holds twenty per cent.

Always confirm which one a number refers to. “We are raising ₹5 Crore at ₹25 Crore” means twenty per cent if that is post-money and about sixteen and a half per cent if it is pre. That is a ₹5 Crore difference in what the founders keep, hidden inside one preposition.

2. Dilution compounds, and that is the part that surprises people

One round is easy to picture. Two or three are not, because each round dilutes everyone who came before, including the previous investors. Take a company that starts wholly founder-owned:

• Seed. ₹3 Crore at a ₹12 Crore post-money. The seed investor takes twenty-five per cent; the founders hold seventy-five.
• Series A. ₹15 Crore at a ₹60 Crore post-money. The new investor takes twenty-five per cent, and everyone already on the cap table is reduced by a quarter. Founders: 75% × 0.75 = 56.25%. Seed investor: 18.75%.
• The pool. Add a ten per cent option pool taken from the pre-money at the Series A, and the pre-money holders absorb all of it. Founders land at 48.75%, the seed investor at 16.25%.

Two rounds and one option pool, both on entirely ordinary terms, and the founders have gone from one hundred per cent to just under half. Nothing went wrong in that story. That is the good version.

3. Why the highest valuation is not always the best offer

A high price is easy to celebrate and expensive to defend. Three ways it turns against you:

• You have to grow into it. Price the seed at a number the next round cannot justify and the next round is a down round, which triggers anti-dilution and is far harder to raise than a flat one.
• Terms are traded for headline. An investor will frequently concede valuation and take it back in preference, participation or a ratchet. The number in the press release is not the number that pays you on exit.
• The pool is hidden in the pre. A higher pre-money with a larger pool inside it can leave founders with less than a lower pre-money with a smaller one. Compare offers on founder ownership after closing, not on the headline.

What a term sheet actually says takes the clauses behind each of these in turn.

4. What actually moves the number at this size

• Revenue quality — repeat over one-off, contracted over hoped-for, direct over a single marketplace that can change its terms.
• Growth rate, consistently measured, over enough months to be a trend rather than a quarter.
• Gross margin, honestly loaded — including logistics, returns, discounts and platform fees.
• Unit economics that work at today's volume, not at ten times it.
• Comparables — what similar businesses in the sector actually raised in the last year, not what was announced three years ago.
• Competitive tension — the honest one. Two interested investors move a price further than any model in the deck.

5. Sizing the round

Decide the number from a milestone, then check the dilution, rather than the other way round. Ask what it costs to reach the next point at which the business is demonstrably worth more, add a buffer for the raise taking longer than planned, and see what that implies. Eighteen to twenty-four months of runway is usually what falls out.

If the answer implies selling forty per cent of the company, the problem is the milestone or the price, not the arithmetic — and it is worth resolving before you go to market rather than during.