the holy grail of every single raise of venture money explained
let’s imagine we are in the ideal world. there’s a calculator where you just put things like your market, traction, how much you want to raise and what %% of dilution you’re willing to take, and it returns your valuation. nice and neat, really clear - no guessing game needed.
in the real world Mira Murati raises a $2B (yes, billion, with a ‘b’) seed for her startup Thinking Machines Lab at a $12B valuation before the product even existed, and with 0 customers.
this is an edge case I’m bringing early so you wouldn’t rely on my words only: getting the golden trio of valuation, dilution and amount raised is quite tricky at the early stage. or, if we put it in simpler words, there are no rules. so how exactly does that work? is the connection as linear as it seems? how to think about those three to get the best terms possible? can you raise $2B too? (and should you, really?)
it took me hours to put it all together and make it as digestible as humanly possible. let’s dive in.
part 1. valuation is the queen. or is it?
let me upset you early with a little reframe: valuation is a fiction, dilution is forever.
valuation is nothing other than a negotiated number = it's what two parties agree to believe today. dilution is purely math. one is a story, the other is a permanent structural change to your cap table. you can’t uno reverse it just like you can’t "divorce" your investors.
at this point you might ask: “so why are all those smart founders obsessed with higher valuation?” and that would be a good question. two reasons:
→ the signaling game. as much as your round size is a financial decision (the runway, the % of the company sold), it’s also a market signal decision. a high valuation attracts talent, press, and future investors. a high valuation is a credibility badge for the corporate customers. sounds cool, right? the caveat is coming.
→ the trap. a high valuation feels like winning, but it creates a trap: your next round has to clear that bar or you face a down round (which is psychologically brutal and signals badly to the market). a down round is when you sell equity cheaper than in a previous funding rounds, because the startup failed to meet the growth benchmarks, faces brutal competition or simply needs cash urgently. not nice. dilutes ownership dramatically, customers and investors start questioning everything, and you are just about to have a bunch of challenging conversations with the team. ouch.
founders who raise at aggressive valuations in good times are essentially borrowing against future performance, and paying interest in stress and pressure.
remember Clubhouse being valued at $4B? worth nothing now. the only way to avoid the down round is to raise a bridge. everyone understands it though, so who are we trying to trick?
the numbers you publish become part of your story whether you want them to or not. founders hate it when I say it, but I’ll say it again: a lower valuation with less dilution is often the better deal.
part 2. money raised: the more the better? well, not really.
when you’re getting money from an investor, this transaction is based on a belief. you can call it a calculated bet later on, but at a pre-seed and seed it’s pure belief.
obsession with a founder and the market situation, and a belief that something will change. and the amount you’ve just raised is how much runway you're buying to prove that belief right.
there’s no right or wrong number. depending on your business model, $500K might buy you longer than $3M would in another niche. when a company raises $500K at a $5M cap vs. $3M at a $15M valuation, the headline numbers look very different, but the question stays the same: how much do we need to achieve XYZ in ___ months.
and the answer will depend on your segment, product, customer, hiring gaps in the team and how fast you can move.
one of the most important messages here: money raised doesn’t validate the valuation. your market and someone’s readiness to pay that $5M or $15M for your company does.
and valuation itself doesn’t validate your real product / business value → money in the bank does. paid by customers, I mean.
the pre/seed vs. Series B asymmetry: a story vs. a scorecard case.
this is where it gets reaaaaaally interesting. at pre-seed and seed, you are essentially selling a worldview. the founder's thesis about a market, a problem, a timing insight.
there are no numbers standing behind it. or the numbers are so early they're more decorative and projected. investors are betting on the person and the narrative, relying on their ability to spot a great founder early.
by Series B, the game has completely changed. now you're presenting a proof of repeatability. investors want to see revenue growing 3–5x year over year, strong net revenue retention, a sales motion that works without the founder in the room, and other possible market discoveries.
the question changes from "do I believe in this?’ to ‘does this model hold at scale?’ valuation at this stage is much more anchored to multiples on ARR or revenue than “oh, we just believe this one will do”.
part 3. the dilution "tax" compounds like debt.
sometimes founders negotiating their first check are thinking about the immediate trade: how much money - how much of the company. the real question here is what that percentage becomes by the time you reach an exit (‘cause you’re building a company to make money, right?)
let’s take two founders, both raising $1M at pre-seed:
- Sue gives up 8.5%
- Emily gives up 15%
at this stage you still have a lot of equity, and the difference feels abstract - it's not like you can see those 15% sitting on a shelf. but you’ve already set up the future dilution outcomes. this is how it goes:
the seed round difference would be around 18% for Sue and 22% for Emily (less leverage at seed, because of the massive dilution at pre-seed). then we have series A at ~20% and series B at ~15% more. say both exit after series B?
Sue exits with ~28% of the company
Emily might own ~ 18% of the company
on a $100M exit, that’s $10M difference. on a $500M exit, that’s $50M difference. and that’s before we ever talked about the exit preference rights (I promise to write a separate issue on the raising terms to make them easy to understand).
please do remember about the compounding dilution and the early employee equity pool reserved. and to make it even more interesting, imagine that 28% or 18% equity is split between the two or three co-founders.
there's also a practical side of things: most institutional investors want to see founders with meaningful skin in the game at series B and beyond. if you're down to 50% before you've raised your series A, that raises questions about what happened. were there messy early rounds? lots of co-founders who left with dead equity? too many angels on the cap table?
if you don’t want to dive into math and there’s only one thing you’ll remember after reading it all, let it be this one:
early dilution is the most expensive dilution: early founders are equity rich and cash poor.
Jeff Bezos talking about Amazon's seed round: “it was the hardest thing I've ever done.” in 1995, Bezos pitched Amazon to 60 investors, explaining what the Internet was and warning of a 70% chance of failure (brave of him). 40 said no. 22 angels wrote $50K checks, raising $1M for 20% of Amazon at a $5M valuation. wild? maybe.
the reason is simple: you're giving away equity at the lowest possible valuation, before you've proven anything. every percentage point at pre-seed costs you a fraction of a cent on the dollar compared to what that same point represents at series B. cheap equity is precisely when you should be most protective of it.
this is also why the structure of early rounds matters so much. a SAFE with a low cap and no discount is a very different instrument than one with aggressive terms. founders who don't read the fine print often discover at their series A conversion that their effective dilution was much higher than the headline percentage suggested. and your early stage investors are getting diluted, too. so you have to be thoughtful of those pro-rata rights that give early investors the ability to participate in future rounds.
back from Jeff Bezos in 1995 to where we are today. founders who give up 15% at pre-seed usually do so for one of three reasons:
a) they needed the money badly and didn’t have any other leverage except the equity %
b) they didn't know better
c) the investor asked and they said yes
founders who hold to 8.5% typically either had competing term sheets, a warm enough financial situation to be patient, or understood the math well enough to push back = highest return on the time spent for prep work and/or good advisory.
so how about taking a Y Combinator’s deal with 7,5% of dilution for $500k? THAT doesn’t sound good at all, right?
dilution vs. value creation: money is not everything that matters about VC $$$.
as you might have guessed from the subheader, the real question is not "how much did I give up?" but "did giving up X% return more than X% in startup value?" if a VC's network, brand, or operational help 5x'd your outcome, the dilution was cheap. if they were a passive check and you could have grown organically = it was expensive.
did selling additional %% of the company mean you’re losing control over board and voting rights? could you raise less to get less dilution if so? dilution is only bad relative to what it bought you.
back to the YC example: no one is massively pleased with the offer of $500k for the 7,5% of your startup. it’s the opportunity founders are after: YC badge = credibility for customers, a foot in the door with a huge pool of investors, and a massive peers’ network. nothing to do with the $$$ check really.
another good example might be Athletic Ventures - they invest and bring elite athletes visibility and network to boost their portfolio companies GTM motion. so you’re getting $$ + an extra value. (that’s not a recommendation or an ad integration - not a single $ was paid and now I’ll be thinking about it till tomorrow probably).
to wrap up: if valuation + money raised + dilution doesn’t have a single simple rule behind them, what does REALLY move the needle? we came full circle to the case of Mira Murati.
the answer is network + credibility.
founders from SF will in general raise more and/or easier - the magic of Bay Area.
founders with a proper pedigree will raise more and/or easier - the magic of Stanford, MIT, Harvard etc
founders with previous impressive projects and/or big logos in their CVs - well, you get it. being ex-CTO of OpenAI massively helps.
disappointing? maybe. is there anything you could do without that ex-Google, ex-Ivy league badges? YES! you’ve got one job only: show why people should listen to you. it’s not great companies that give people big ideas. it’s big ideas that get people to build great companies. you’ve got it. ттттттттттттттттттттттт