Your Series A term sheet just landed, and the lead investor is offering $10 million at a “$40 million valuation.” Your co-founder is already celebrating on Slack, because 20% dilution sounds reasonable, right?
Not so fast.
That “$40 million valuation” could mean two completely different things. If it’s post-money, you’re giving up 25% of your company, not 20%; if it’s pre-money, your co-founder’s math checks out. The difference is $2 million in extra dilution, or roughly the value of keeping another senior engineer’s worth of equity in founder hands.
This confusion happens more often than you’d expect. Founders walk into negotiations thinking they understand the numbers, then discover halfway through that they’ve been calculating ownership on the wrong basis. By then, the terms are set, the handshake is done, and you’re trying to explain to your early employees why their options are actually worth less than everyone thought.
Valuation is a system of metrics, and each one tells a different part of your company’s story.
- Pre-money valuation shows what investors think you’re worth before they write the check.
- Post-money valuation tells you what you’re worth after the capital hits your bank account.
- Enterprise value reveals your full economic value: equity plus debt minus cash, which is the real price tag if someone wanted to buy you tomorrow.
You need all three. These numbers set the terms for every term sheet, every board meeting, every M&A conversation, every scenario where you’re modeling your future. This guide breaks down the formulas, and shows you how to calculate and track these numbers in Runway so you never walk into a negotiation half-blind again.
Understanding pre-money valuation
Pre-money valuation is what your company’s worth right before new money lands. It sets the baseline. Investors get their ownership based on this number.
Pre-money determines how much equity you and your co-founders keep. The higher the pre-money, the less equity you give up for the same investment. It also sets the benchmark for your next round: future investors will pull up your last term sheet to see how much you’ve grown since then.
Pre-money valuation pops up in every chat with investors. It’s more than a number on a page; it reflects your traction, opportunity, and growth.
Key formulas for pre-money valuation
Most teams use this formula:
Pre-money valuation = Post-money valuation - Investment amount
Say your post-money is $10 million and you raise $2 million. Your pre-money is $8 million. Simple math, but you need the post-money number first.
You can calculate it by price per share:
Pre-money valuation = Price per share × Pre-investment fully diluted shares outstanding
This method uses the share price investors agree to pay and your total share count before the investment. It comes in handy when you’re negotiating share price directly (some investors lead with price per share rather than overall valuation).
Or work backwards from ownership:
Pre-money valuation = (Investment amount × (1 - Ownership percentage)) / Ownership percentage
If an investor puts $3 million in for 20% equity, pre-money is ($3M × 0.80) / 0.20 = $12 million. You’ll see this method if someone leads with an ownership target instead of a valuation.
Sometimes you’ll have to reverse-engineer it from the term sheet economics. If the sheet says investors will take 25% ownership after investing $5 million, post-money is $20 million ($5M / 0.25). Pre-money is $15 million.
Practical considerations for pre-money valuation
Which share count you use matters. Fully diluted shares count everything: issued shares, options, warrants, convertibles that could become shares. Basic shares only count what’s issued now. Always wse fully diluted; anything else hides dilution and creates confusion you’ll regret later.
Option pools add complexity, and often catch founders off guard. Many term sheets require a specific option pool size after the investment closes (say, 15% of the post-money cap table). If you need to create or expand the pool to hit that number, it comes out of pre-money value and dilutes founders, not investors. This is the “option pool shuffle,” and it’s where founders lose equity without realizing it during negotiations.
If you have convertible notes or SAFEs outstanding, they’ll convert during a priced round, which increases your share count and changes the pre-money math. Model the conversions carefully, including any discounts or valuation caps, to get the true pre-money with everything converted.
Prior rounds might have anti-dilution protection built in. These can lower conversion prices if you raise at a lower valuation. They help early investors, but dilute founders and others. Track all these adjustments so you’re not surprised.
Secondary transactions, where founders or employees sell shares directly to investors, don’t change the company’s valuation, but they do shift the cap table dynamics. They can also signal to new investors how insiders value the company.
Early-stage companies face their own challenges. Without meaningful revenue or strong comparables, pre-money valuation becomes more about your team, market size, and early traction. Negotiations here are less spreadsheet math and more storytelling backed by whatever data points you have.
Understanding post-money valuation
Post-money valuation is what your company’s worth right after fresh capital hits the bank. This number directly determines investor ownership. If you raise $5 million at a $25 million post-money, those investors own 20% ($5M / $25M).
Post-money also sets the starting point for your next fundraise. New investors will look back at it to see how much you’ve grown. A 3-4x jump between rounds signals strong momentum; flat or declining post-money raises red flags before you even get to the pitch.
Key formulas for post-money valuation
The classic formula is simple:
Post-money valuation = Pre-money valuation + Investment amount
If pre-money is $15 million and you raise $5 million, post-money is $20 million. It’s the approach you’ll spot most often on term sheets.
There’s also the price-per-share method:
Post-money valuation = Price per share × Post-investment fully diluted shares outstanding
This keeps everything aligned. Share price times the new, bigger cap table after the round.
Or use the ownership method:
Post-money valuation = Investment amount / Investor ownership percentage
If investors put $8 million in for 25%, post-money is $32 million. This works well when ownership stake leads the negotiation.
SAFEs and notes with valuation caps convert based on those caps, regardless of your actual round valuation. If your SAFE has a $10 million cap and you later close a $30 million Series A, SAFE holders still convert as if the post-money were $10 million. They get better terms because they invested earlier and took more risk.
Practical considerations for post-money valuation
Account for everyone investing in the round, including existing investors who participate. All their capital goes into the total investment amount. If current investors also put in more, that’s included too. The formula doesn’t change.
Multiple closes or tranched investments require careful tracking. If you raise $3 million now and $2 million in a second close six months later, decide whether you’re treating these as one round or separate raises. The choice affects how you report dilution and can change your story in the next fundraise.
Increasing the option pool as part of a financing round directly affects post-money valuation. If your term sheet sets a 15% option pool, include it in the fully diluted share count. That way, everyone sees the true picture of ownership.
If you have multiple security types (common stock, preferred stock, convertibles), model the full cap table, including their different rights and liquidation preferences. Each security may have a different impact on how post-money value flows to shareholders in an exit.
The fundamentals of enterprise value (EV)
Enterprise value tells you what it would actually cost to buy your entire company. It’s your total business value with both assets and liabilities baked in.
EV differs from equity value in a crucial way: equity value is what shareholders own; enterprise value is what the business itself is worth, regardless of how it’s financed. This makes EV the go-to metric for M&A and comparable company analysis, because it lets you compare businesses with wildly different capital structures on equal footing.
Investors and acquirers use EV to calculate multiples like EV/EBITDA and EV/Revenue. These multiples enable apples-to-apples comparisons across companies. A debt-heavy company and a debt-free company can trade at similar EV multiples even if their equity values look nothing alike. Equity multiples miss this, since they’re distorted by capital structure.
Key formulas for enterprise value
The standard formula is:
Enterprise value = Equity value + Total debt - Cash and cash equivalents
Start with equity value, add all debt, take away cash on hand. If equity value is $50 million, debt is $10 million, and cash is $5 million, the EV is $55 million.
The expanded view includes more claims:
Enterprise value = Equity value + Total debt + Preferred stock + Minority interests - Cash and cash equivalents
If preferred stock has debt-like features or you have subsidiaries with minority owners, include those too.
For public companies, find equity value by:
Market cap = Share price × Shares outstanding
For private companies, equity value typically comes from your last funding round (usually the most recent post-money valuation), adjusted if business conditions have changed materially since then.
For M&A, use total enterprise value:
Total enterprise value = Equity value + Debt + Preferred stock + Minority interests + Unfunded pension liabilities - Cash
This ensures buyers see the full acquisition cost, including less obvious liabilities that will become their problem after closing.
Practical considerations for enterprise value
For private companies, start with your last funding round for equity value, but adjust for market conditions if valuations have shifted since then. Here’s what to check:
- Debt coverage: Include all obligations (loans, bonds, capital leases, convertible notes, and off-balance sheet commitments) that represent real economic claims.
- Usable cash: Only subtract accessible cash and liquid securities. Ignore restricted cash sitting in escrow or pledged as collateral.
- Preferred shares: Add preferred stock to EV if it behaves like debt, such as mandatory redemption features, cumulative dividends, or senior liquidation preferences that make it more bond than equity.
- Hidden liabilities: Include minority interests in subsidiaries and unfunded pension liabilities. These are real economic obligations that affect what a buyer actually pays.
- Complex securities: Decide how to treat convertibles, warrants, and other hybrid instruments. You can value them at face value, convert them to common equivalent, or treat them as debt depending on their terms.
Connecting the dots between these three valuations
- Pre-money and post-money bookend your fundraising round. Pre-money is your starting point; post-money is the result after that round. The relationship is direct: post-money equals pre-money plus the new checks.
- Right after a round closes, your equity value typically matches your post-money valuation. Over time, equity value moves as results change or markets shift. Post-money is just a snapshot. Equity value updates with the real world.
- Enterprise value builds on equity value by adding debt and subtracting cash. If you have little debt or cash, both are about the same. As you grow and take on more debt or boost cash reserves, EV rises beyond equity value.
- Ownership dilution connects all three metrics. Raising capital grows your post-money but shrinks your percentage. The difference between pre-money and post-money shows you this change. EV sums up the value for everyone, both owners and lenders.
- Your cap table is the foundation for everything. It tracks who owns what, which feeds equity value. It also forecasts dilution from convertibles, which move both pre- and post-money. Fully diluted shares matter for every calculation.
- Investors look at all three metrics to model their returns. They compare their entry post-money number to estimated exits built from EV multiples. When you understand and track each one, you stay in control during negotiations and planning.
Benchmarks, pitfalls, and market norms
Valuation norms fluctuate based on stage and market sentiment. Pre-seed rounds typically range from $2 million to $10 million, while Seed rounds hit $5-15 million. Investors usually target 15-25% ownership at Seed and 20-30% at Series A. Sector multiples vary wildly too. AI SaaS companies may trade at 20× ARR, whereas general SaaS lands near 10-15x and slower growth models sit at 8-12x EBITDA.
You can keep your valuation models accurate and your negotiations clean by following a few key principles.
- Clarify value definitions. Specify pre-money versus post-money early to avoid costly misalignment. Distinguish enterprise value from equity value for accurate M&A comparisons.
- Track true ownership. Calculate fully diluted share counts including warrants and options. Model convertible notes and the option pool impact directly since these often dilute founders first.
- Refine enterprise value. Include capital leases and preferred shares as debt claims. Deduct only available cash rather than restricted funds.
- Plan for growth. Normalize capital structures with EV multiples for fair comparisons. Set a valuation expectation you can beat to ensure future fundraising success.
How to calculate pre-money, post-money, and enterprise value in Runway
You can build a dynamic valuation model in Runway that updates instantly as you change assumptions. By setting up a few core drivers and formulas, you create a system that updates automatically as your inputs change.
Set up your valuation drivers
Start by creating a new Model called "Valuation & Cap Table." You'll need to create Number-type drivers to handle your key inputs.
Add these drivers to your model:
- Round Share Price
- New Capital Raised
- Pre-Round Fully Diluted Shares
- Cash & Cash Equivalents
- Total Debt
Enter your current values directly into the cells for the month your round closes. Formulas basics allow you to mix hard-coded values and formulas within the same driver.
Calculate share issuance and equity value
Next, you need to calculate how the round affects your cap table. Create a driver for New Shares Issued and use Runway's Functions & operators to write this formula:
New Shares Issued = New Capital Raised / Round Share Price
Calculate your Post-Round Fully Diluted Shares by adding New Shares Issued to your pre-round share count.
With those share counts ready, you can determine your equity value. Create a driver for Pre-Money Equity Value and multiply your pre-round shares by the share price. For Post-Money Equity Value, you can either multiply your post-round shares by the price or simply add the new capital raised to your pre-money value.
Restrict values to the round date
If you want these valuations to appear only in the specific month the round closes, use conditional logic. Create a date driver called Round Close Month. Then, update your value formulas using an IF statement. You can see more on Formulas syntax here.
Pre-Money Equity Value = IF(thisMonth() == Round Close Month, Pre-Round Fully Diluted Shares * Round Share Price, NULL)
Calculate Enterprise Value (EV)
To define your Enterprise Value, you first need to calculate Net Debt. If your GL data is already in a database, aggregate your cash and debt accounts using sum() over the relevant segments. This works just like Building a P&L.
Create a Net Debt driver that subtracts Cash & Cash Equivalents from Total Debt. Finally, create your Enterprise Value driver:
Enterprise Value = Post-Money Equity Value + Net Debt
To limit this calculation to finalized financial periods, use lastClose() to gate the formula. Read more about Last close logic to keep your reporting clean.
Compare scenarios side-by-side
The real power comes from testing different outcomes before you're locked into terms. Create scenarios for various round sizes or share prices. Because scenarios in Runway act as frozen versions of the same model, you see the impact of each change immediately.
Add a driver table block to your page and pull in your equity and EV drivers. Use the Compare feature to view these values across different scenarios side-by-side, following the same workflow used for Budget vs. actuals.
Take control of your financial story
Understanding pre-money valuation, post-money valuation and enterprise value turns a negotiation from a guessing game into strategic discussions where you actually know what you’re agreeing to. You gain clarity on every round and build trust with your investors by speaking their language fluently.
The formulas may be straightforward, but the nuances determine outcomes. Keep close track of your fully diluted shares and option pool mechanics, since this is where founders lose equity without realizing it until after term sheets are signed.
Runway moves valuation modeling out of fragile spreadsheets and into a live, scenario-driven system that evolves with your business. You see more clearly and plan faster. Most importantly, you keep your team aligned on what different fundraising paths actually mean for ownership and outcomes.
Ready to build smarter valuation models and take charge of your company’s financial story? Get started with Runway.