The Risk Of Accepting A High Valuation

And how to correctly value your startup

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If your dream investor offered to invest in your startup at a higher valuation than you planned to ask for, would you take the money?

Of course, right?

High valuation = low dilution = more equity for the founders and/or more to offer in future rounds. Done deal. Send over the term sheet please.

Turns out it’s not quite that simple. Paul Graham agrees:

Most founders don’t think about the downsides. My last startup made this mistake twice. We raised:

  • A seed round at a $20 million cap with $0 recurring revenue (~$250,000 total revenue)

  • A Series A at a $85 million cap soon after launching our subscription offering

At the time we were thrilled. In fact we negotiated hard to get those terms.

We were a hot startup, but the terms put us in a tough spot for any future rounds.

We put ourselves on a treadmill where we needed to generate a ton of revenue fast to grow into our valuation before we burned through the investment. Otherwise, eventually, we’d be dead in the water.

Today I’m sharing:

  • How to know what valuation to raise at

  • When are terms too high?

  • Why do investors make high offers?

  • Why do founders accept high offers?

  • What actually happens when you accept a high offer?

The Risk of High Valuations

How to Know What Valuation to Raise At

First things first. Set an (internal) benchmark for the valuation you want to raise at before you even engage investors based on how much capital you’ll need to raise the next round, and current market conditions.

  1. Map out the milestones you need to hit for your next round

  2. Understand how much you expect to burn to hit those milestones

  3. Calculate how much you need to raise, given that burn + 12 months of runway

  4. Determine your target valuation based on how much you need to raise and expected dilution

  5. Check the markets — does that target match the current reality for the stage you’re at? Adjust if needed.

The full piece goes into more detail and shares formulas to help you make calculations along the way.

When Are Terms Too High?

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