fresh.fund’s Investment 101 for Startup Founders

So, you thought about this amazing idea, prototyped it, and maybe even gained some actual customer traction. Now, you need that certain amount of cash to make the idea become a reality that would change our world!

As an early-stage entrepreneur, one of the most crucial factors of your future success lies in securing a solid investment. In the following article series, we would go into details about the most important aspects of how investment affects you and your new company.

All of us read about company X who raised $$M at $$$M valuation, but what does it actually mean for the company and its founders? Today we will understand how taking an investment affects how much you will still own of your company, and what would be company’s worth.

In fact, there are two different terms for valuation and it is important to know the difference between them:

Pre-Money Valuation: The valuation of the company prior to investment.

Post-Money Valuation: The valuation of the company following the investment.

If we combine the pre-money valuation, and the amount of money raised, we could also calculate the impact on the company ownership percentages.

An Example

Let’s take an example case of our newly found startup “Examply”. It has two co-founders who hold 50% of the company each. They want to raise $100K at a $900K pre-money valuation. That means that their post-money valuation is: $100K + $900K = $1M.

The investor ownership percentage is calculated as: (amount of investment) / (post-money valuation)

Which means that in this case the investors would own (100K/1M) = 10% of the company, and each founder’s stake was diluted by 10% from 50% to 45%.

There is a misleading concept that taking an investment decreases the valueof the founders equity. Let’s do a simple calculation and see this is not the case.

Before taking the investment, founder A owned 50% of a company which is worth $900K. That means his holdings were worth 0.5x$900K = $450K. Now, founder A owns 45% of a $1M company and his holdings are worth 0.45x$1M = $450K! That means that he maintained the value of his holdings while gaining some vital funds for the growth of his company. Win-Win.

These calculations are some of the math you should know when raising money, but they don’t tell you how much you should raise.

In the next article we will discuss different forms of investments, and the importance of your company valuation.