There are many terms in a startup fundraising terms sheet.

Valuation is the primary factor impacting investor returns.

Here’s an example showing the impact of valuation on the returns.

The pre-money valuation plus the investment yields the post-money valuation.

The investor’s ownership is the investment divided by the post-money valuation.

For example, if a startup is raising $1M with a $4M pre-money valuation that yields $5M post-money.  

This gives the investor a 20% ownership stake as the post valuation is $1M divided by $5M.

In another example, a startup is raising $1M with a $19M pre-money valuation that yields $20M post-money.  

This gives the investor a 5% ownership stake as the post valuation is $1M divided by $20M.

There are terms that can help mitigate an outsized valuation such as a liquidation preference in which the investor receives their original investment first.

Of all the terms in the deal, the valuation is the primary factor to consider.

 

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.
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Thank you for joining your host Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.