A framework to think about pricing seed, angel, and venture capital rounds

How do you price a round?

Its one of the most often asked questions and yet I've never seen a great answer given. It seems to me that the most important factor in pricing your round isn't your progress or your idea. It seems to come down to two things:

1) How much do you want to raise?

2) Supply and demand of capital willing to invest in your company.

The second is pretty obvious, but what about the first? So the more you want to raise, the more your company is worth? Kind of, actually...but how much money a team gets has to do with a number of factors that reflect things like trust in the team, risk, etc. So instead of pricing that into how much a company is worth, they tend to price it into round size.

More simply, the better the team, the lower the risk, and the higher the expected outcome, the more you're going to be willing to give a team and the longer you'll let them go until their next fundraising.

Sometimes, this also relates to capital requirements of what the team needs. For web development, usually it's pretty much the same across the board, but if you're making jewelry in China, it's going to be hard to get much done with a 500k seed round.  Usually, teams are asking for enough money, plus a cushion, to get to some milestone roughly 12-18 months out.

So, ask for more and you're get a higher price IF the investors think you can handle it and you need it.

Generally, each round is going to set you back between 15-30%. That means investors are going to buy that much of your company at a time. It's a function of a few things. That means that founders as a group will be right around 50% ownership after two rounds. It means lead investors can get to 10, 15 or 20% ownership depending on whatever math they have that makes their own success model work. That's just roughly the equilibrium we've come to in this world.

Let's say the default, for simplicity's sake, is to take 20% of every round. More often, its probably closer to 25%, but since this is a blog post, I'll try to look more entrepreneur friendly. The question then becomes whether or not there's any significant reason to move off of that default.

Note that, to even get venture in the first place, you are special. Your team must be awesome and your idea must have huge potential. Getting less dilution than standard means that you have to have made fantastic progress, have a world class team, etc. way above and beyond what normally gets funded at this stage.

The other way to move that number is much more simple-- generate more demand for the round than there is supply of allocation. If two million of money wants in to this deal and they're raising one million, it's unlikely that me and my fellow investors are going to get the chunk of the company we normally get. If you're not fully subscribed, though, then I'm probably going to stick with a more normalized price since I'd rather not negotiate against myself.

Just so you see what the results of dilution and raise size come out to be, here's the 2nd grade math in a chart:


One note is that I'm talking about equity here--but no matter what kind of deal you strike, there's usually an equity equivilant.  Some people think that by raising a convertible note, they're not pricing a round.  Bullshit.  Whatever cap you put on the round, that's essentially the price, because no one would bet on you unless they thought you could beat the cap--so its essentially equity.  Uncapped notes, on the other hand, leave the investors and the entrepreneur misaligned.  I'm not exactly hoping for near term success because my price isn't locked in.  Investors should be able to lock in a price that reflects the risks at the moment they pulled the trigger.  Call me old fashioned.

So, there it is.  It's not that complicated, really.