Startup Valuation

Early Stage Valuation Methods

V. 100517, V2. 081020

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Purpose

The purpose of these slides is to

• Help you understand the different methods professional private equity investors may use to determine the value of your new venture
• Help you identify which valuation method(s) is (are) most appropriate for the stage of your venture and the type of business it is in
• Help you speak with confidence to different investor audiences about the value of your venture in terms of appropriate valuation methods, milestones, achievements, and mitigated risks

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Use the startup valuation explorer file

Right here

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How to think about early-stage startup valuations

• Early-stage ventures have little value
• You build value in your company by accomplishing milestones (validating product, customer base goals)
• Equity funding involves trading a portion of ownership in your company to an investor in exchange for cash to pursue milestones
• The investment amount and valuation determine how much equity ownership you give up to investors
• There are no exact formulas for determining early-stage valuations
• Valuation of company is established by agreement between you and investors
• Investors want a low pre-money valuation; owners want a high one

All leading to...

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The first rule of startup valuation

Your startup is worth whatever you and the investor agree it’s worth

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Valuation increases at each stage of equity funding

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• You reduce risk in your startup by acquiring customers, launching products, and developing supporting operations
• Reducing risk adds value to your startup at each round of financing
• As outside investors finance your company, you give up a portion of your ownership

Example progression of funding stages, investor types, and valuations of typical startup

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Valuation and funding terminology

Pre-money valuation: value placed on company before an investment round; a key point of negotiation between founders and equity investors

Post-money valuation: value of the company after the investment round. Investment amount + Pre-money valuation = Post-money valuation

Founder dilution: amount of ownership given up by startup founders, expressed as a percentage, e.g., “founders are willing to give up 20% dilution in exchange for a $200,000 angel fund investment

Investor dilution: early investors give up a portion of ownership when future rounds are raised. Early investors can negotiate for anti-dilution rights attached to their preferred shares

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Valuation and funding terminology

Raise or round (investment round): process and result of raising money for your startup. Each round is given a name, such as Series A or Series B, etc.

Priced round: Agreeing with investors on the valuation of a startup and by extension the price per share of stock

Down round: Founders accept an equity investment at a lower valuation than previously established

Seed round: an investment used to start the company and create its first products or services

Series A, Series B, etc.: Typically the first venture capital rounds

Equity: ownership of the startup

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Pre-Money Valuation + Investment Amount = Post-Money Valuation

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Two perspectives to basic valuation

Entrepreneur

• Considers how much value s|he has built into the venture by reducing uncertainties and risks and hitting key milestones such as sales, profits, customer development, product development, etc.
• The entrepreneur’s perspective is pre-money valuation and investment amount
• Post-money is implied by the entrepreneur’s perspective

Investor

• Considers what percentage of the company s|he wants for the investment amount sought by the entrepreneur
• The investor’s perspective is investment amount and post-money
• Pre-money is implied by the investor’s perspective

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Negotiations over value will therefore focus on the percentage of the company offered to the investor and the investment amount offered to the entrepreneur

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The Basic Valuation Equation

1. Assign a value to the startup before the investment dollars are received (determine pre-money valuation; hint: this is more art than science)
2. Add the investment amount to the pre-money valuation
3. Divide the investment amount by the post-money valuation to give the equity percentage owned by the investors

Pre-$ valuation ($2M) + Investment amount ($1M) = Post-$ valuation ($3M)

$1M / $3M = 33% Investor ownership

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Confusing? See next slide

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The Basic Valuation Equation

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If 33.3% of the company is worth $1M,

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then 100% of the company is worth $3M

The pre-money is inferred by the value placed on a percentage of the company

The Basic Valuation Equation Inverted

• Determine how much of an investment you need to achieve your next milestone and how much ownership of the company you are willing to give up for that investment. (Hint: Focusing on the next milestone gives investors a tangible target for how you will use their money to build value)
• Divide the investment amount by the percentage ownership you have awarded to the investor to get the post-money valuation
• Subtract the investment amount from the post-money valuation
• Ask yourself: Does this pre-money valuation fairly represent the value I/we have built into the new venture?

Investment amount ($1M) ➗% ownership (33%) = Post-$ valuation ($3M)

Post-$ valuation ($3M) - Investment $ ($1M) = Pre-$ valuation ($2M)

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Valuation and Raise Amount Sanity Check

• The amount of funding you seek should make sense with regard to your pre-money valuation. Consider:

Pre-money valuation / 2 = Maximum Raise

• Dividing your pre-money valuation by two gives you a good ballpark for how much you can raise in a particular round.(Hint: This is why you should always be looking for ways to build value into your company)
• Here the investor gets 33% of the equity after the investment.
• This is simplified. Option pools and other factors can change the ownership math

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Potential pitfalls on the way to early stage valuation

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Early-stage valuation pitfalls

• Too early
• Too high, too early
• Lack of customer validation
• Valuing the idea or market potential
• Raise amount, equity, and valuation disconnect
• Over optimizing your valuation
• Fixating on valuation only

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Early-stage valuation pitfalls - Too early

• Founder enters into equity deal very early with a friends and family deal.
• Example: Rich uncle gives you $20,000 for a 20% share or the company while you and co-founder are still formulating idea; post-$ valuation is $100,000
• If founders need additional equity investments, they will have trouble justifying why uncle owns 20%.
• Solution: use crowdfunding / bootstrapping and/or convertible debt instead

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Early-stage valuation pitfalls - Too high, too early

• Founders encounter enthusiastic (inexperienced) investors willing to value the startup at a high level early in the startup’s lifecycle.
• For example, establishing a $4M valuation for an idea-stage startup with no paying customers + inexperienced team = too high, too early
• This situation increases the likelihood of a down round later or no funding at all from experienced investors

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Early-stage valuation pitfalls - No customer validation

• Sophisticated investors expect early-stage startups to be engaged with potential customers, even if working versions of product/service are still under development
• Customers validate that the product solves a big problem and that customers are willing to pay for it
• Advice: Establishing a substantial valuation prior to building a customer track record is a mistake you must avoid

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Early-stage valuation pitfalls - Valuing the idea or market potential

• The startup team and the milestones achieved comprise the core of all valuations. Have experienced founders with prototypes developed, technology proven, paying customers, IP issued, skilled recruits, etc., are milestones that add value to the venture
• In contrast, business plans, forecasts, etc offer little value to investors
• Action: Identify appropriate milestones and achieve them

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Early-stage valuation pitfalls - Raise amount, equity, & valuation disconnect

• This is classic rookie mistake: “$250,000 for a 5% equity stake” implies a $5M post-$ valuation; have you built $4.75M of value into your company already?
• Action: connect your raise amount with your pre-money valuation
• Pre-action: always be aware of your current “pre-money” valuation and work to increase it

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Early-stage valuation pitfalls - Over-optimizing valuation

• Instead, learn to accept valuations that are “within range” of the value you are seeking
• Spending too much time negotiating the highest possible valuation wastes time and signals you are an inexperienced founder
• Advice: giving up a few additional % points of ownership to close an investment round and get back to building the business is usually the best move

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Early-stage valuation pitfalls - Stuck on valuation only

• Founders often focus too much on negotiating a high pre-money valuation when raising $ from angels.
• BUT there are many other “deal points” that influence how much control and potential exit proceeds founders will end up with in an investment deal (e.g., liquidation preferences, voting rights, board of director seats) - we’ll discuss this in the Term Sheets part of the course

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Pause

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Down rounds (see also “the down round”)

An equity investment at a valuation lower than previously established; the company is now worth less than it was at the previous investment round

Why does this happen? Because the startup is running out of cash. Usually because it has not yet reached a milestone that would point to a higher valuation.

To close the down round, founders will accept more dilution in exchange for more cash to keep the startup alive

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In down rounds, founders and previous investors get diluted AND realize a lower valuation

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Some causes and effects of down rounds

• Raising too much, too early: raising too high an initial funding round (i.e., $millions) makes it almost impossible to gain enough traction to justify a higher valuation in next round
• Burn rate too high: high monthly burn rate coupled to delayed milestone achievement results in founders asking for additional $ to keep the company alive. This provides leverage for investors. Flat or down.
• Founder motivation: Founders get diluted in down rounds and can become demotivated
• Effects on employees and other stakeholders: morale and motivation of employees can plummet, especially among option holders

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Signal that the CFO expects to be frugal. Dinner for board of directors meeting

Determining early stage pre-money valuations

It seems so important! How do we justify our pre-money valuations?

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Determining early stage pre-money valuations - Four categories

1. Company factors
2. Deal factors
3. Macro environment factors
4. Local environment factors

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1. Company factors

• Founders and team
• Market size
• Revenue projections
• Technology or market solution
• Competition
• Intellectual property
• Customer traction
• Exit potential
• Board of directors and advisors

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2. Deal factors

• Pre-money valuation and investment amount: do they align with investor’s expectations for ownership?
• Term sheet deal points: will investor get preferred share rights that make investment less risky?
• Amount already invested
• Stage of the startup
• Need for additional investment

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3. Macro environment factors

• Industry trends: growing, flat, or shrinking? Trends that could help or hurt prospects for startup’s success?
• Economy: Is the country in a recession? Or growing?
• Political: e.g., changes in tax credits and deductions
• Regulatory: federal, state, local regs that could affect the startup or its market

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4. Local environment factors

• Comparables (comps) are the similar startups in your local or regional area. Have they been successful in raising startup funding?
• Recent exits: similar companies that have recently been acquired or IPO’d? Investors view this as huge validation
• Saturation: How many high-quality, investable startups are there competing for the limited amount of investor dollars in your local area?

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The founder’s “pre-money” perspective: “How much is my company worth?”

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Early stage valuation methods

Many methods for estimating pre-money valuations for startups

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Early stage valuation methods - Table of Contents

• Market comp valuation method
• Step-up valuation method
• Risk Mitigation Valuation Method
• VC Quick Valuation Method
• VC Valuation Method

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Early stage valuation methods

• Learning objective: Know how to combine several methods for estimating a pre-money valuation for a startup
• BLUF*: You will likely get different results from each of the different methods; that’s OK and expected. You will need to create a narrative of which method and valuation are most relevant to your startup
• Experienced entrepreneurs use structured methods to come up with valuations because the structure provides a basis to share and sell the value of the startup’s accomplishments and capabilities
• Challenge: Be able to answer this investor question: “How did you arrive at this valuation?”

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*Bottom Line Up Front

Pro tip: share price comes later

When working through valuation calculations, think and discuss in terms of total value of valuation, not price per share. PPS is determined AFTER the valuation is established.

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Market comp valuation method

One of the quickest ways to establish a valuation for your startup

Compare it to another startup that has already closed a funding deal

Used by investors to get a quick estimate valuation for your startup

Logic:

“You are like startup X and it was just valued at $1.5M pre-money, so your startup must also be in that same pre-money range”

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Market comp valuation method

Added benefit of valuation comps:

Comps provide additional valuation for an investor; it other investors put money into the startup being used as a comparison to your startup, then it means the investors believe several things must be true

Valuation comps give the investor some confidence, aka, “There are other startups out there getting funding like the one I’m considering, so my investment might be safe or even profitable.”

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Market comp valuation method

Method overview

The market comp method is the most straightforward valuation method - find a startup that closely resembles your and has a publicized valuation (think Crunchbase.com) - same stage of development, similar team, similar market segment, similar technology or similarly unique offering.

Experienced investors in areas of the country with high startup activity use market comps to establish initial valuations for negotiations with startups, so this method works better in places like Silicon Valley, Boston, NYC, etc

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Market comp valuation method: mechanics

1. Create a short profile of your startup
2. Find similar startups with known valuations to use as comps
3. Compare your startup profile to the comp’s profile
4. Adjust the comp valuation for large and obvious differences (e.g., you still need to hire key members of your team, no revenues, no prior “exit” experience as an entrepreneur)

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1.Create a short profile of your startup

List the factors that describe your startup, e.g., stage of development, target markets, tech approach, & customer traction. Example profile →

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2. Find similar startups with known valuations to use as comps

USe these sites:

• AngelList
• CrunchBase
• Hacker News
• Gust

Then make a list of the startup’s attributes similar to the one you made in Step 1

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3. Compare your startup profile to comp’s

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4. Adjust comp valuation for large + obvious differences

E.g., stage of development, market size

When you find a good comp where most of the factors match except for one or two, adjust the valuation up or down to compensate for the difference

Not an exact science; use your best judgment and MAKE A NOTE WHY YOU MADE THE ADJUSTMENT - you will need to defend your valuation to investors

(By the way, you should ALWAYS document any method you use and the assumptions you based your valuation estimates on)

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Market comp considerations

• Use more than one: Don’t rely solely on a market comp as the only basis for valuation. See Step Up, Risk Mitigation, and VC Methods
• Heavy startup activity: Using comps is most practical in geographical areas concentrated with angel and VC investors - lots of deal flow there
• Head to head comps: if you find a head to head competitor (same customers), use its valuation but be sure to differentiate your startup from competitor
• Your team
• Your ability to execute
• Technology & IP
• Market timing
• Funding plan

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Pro tip: short discussions

Reaching an agreeable pre-money valuation is usually quick work for experienced investors and entrepreneurs

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Step Up valuation method

This method uses “yes-or-no” questions to arrive at a pre-money valuation and is granular enough to be defensible when negotiating with investors

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Method Overview

Inspired by the Berkus Method

Loosely quantifies major factors that strongly influence a startup's valuation and chances for success.

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Method Overview

• Step-Up Model

10 valuation factors

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Method Overview

• $250,000 for each yes

Each “Yes” checked out of the 10 valuation factors earns you another $250,000

Note that some early-stage startups may have checked all or nearly all of these and may be worth substantially more than $2.5M pre-money

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How to use the Step Up method

1.Rate your startup on the 10 step up valuation factors

2. Calculate your total pre-money valuation

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Psstt… see the steps? Hence the name

Step Up considerations

Substitute factors in the list: if you think it has significant impact on your valuation and is defensible to investors. Example: you have attracted an all-star board of directors (BOD)

All-or-none factors: Some investors may consider some factors all-or-nothing deal points.

Partial credit: instead of all-or-nothing, consider giving yourself partial credit for some factors (AGAIN DOCUMENT WHY YOU DID THIS)

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Speaking of the Berkus Method...

The Berkus Method assigns a number, a financial valuation, to each of four major elements of risk faced by all young companies – after crediting the entrepreneur some basic value for the quality and potential of the idea itself. Today, the method as explained, adds $500,000 in value for each of the following risk-reduction elements:

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Berkonomics.com

Speaking of the Berkus Method...

...these numbers are maximums that can be “earned” to form a valuation, allowing for a pre-revenue valuation of up to $2 million (or a post roll-out value of up to $2.5 million), but certainly also allowing the investor to put much lower values into each test,:

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Berkonomics.com

Pro tip: there are no “rules”

There are no exact formulas or even universally accepted methods for establishing early-stage valuations; regardless of which model you use, be able to explain your valuation and underlying assumptions

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Risk Mitigation Valuation Method

Assigns dollar values to the accomplishments and validations of the startup in four categories of risk mitigation

1. Technology: Does your product work? Can you make it and deploy it at a cost that supports your business model? Are you building layers of protection around it?
2. Market: Do customers care? WIlling to pay? Sufficiently large market?
3. Execution: Experienced in the segment you are targeting? Track record?
4. Capital: Have founders invested personal funds? Raised F&F, showing others are willing to put their faith in you? Do you have a funding plan that outlines key milestones?

Why you need to know this method: This one is most specific to your venture and how your hard-earned validations add value to it.

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Example Risk Mitigation Valuation build up

Execution risk mitigation

• Experienced founders, previous startups: $200,000
• Prior exit: $250,000
• Detailed execution roadmap in place: $50,000

Capital risk mitigation

• Early funding (F&F): $50,000
• Only two angel rounds needed: $100,000

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Technology risk mitigation

• Prototype developed: $75,000
• 3rd party testing done: $25,000
• IP protection underway: $25,000

Market risk mitigation

• Market research: $20,000
• Early adopter program in place: $100,000
• Channel partners established: $40,000

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Total: $935,000 pre-money valuation for this example - NOTE: These are not the “costs” the startup incurred; they are the value “to” the startup

The Risk Mitigation Method Advantage

Offers the advantage of summing many smaller elements or small victories

An investor can argue that one number is too high, but that number may be a small piece in total evaluation - the impact of that lowering impacts the total valuation less

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Risk Mitigation valuation, step by step

1. Create list of all startup’s accomplishments (like a resume!): money, travel, people, exposure, events, design, process, metrics… validation
2. Place each accomplishment in one of the four categories: tech, market, team, capital
3. Assign a value to each task/accomplishment in the list: big achievements get big values; e.g., paying, returning customers
4. Apply value multipliers where needed: some accomplishments are worth more than others, e.g., Lifetime Value of monthly paying customers
5. Add it up: for total pre-money valuation

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Risk Mitigation considerations

Sanity check:

• Lots of accomplishments, but low #? Maybe you’re undervaluing them.
• Pre-money of $1,000,000 and only in early idea stage? Overvalued.

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Risk Mitigation considerations

Technology development dollars: Deciding how much value to place on Research and Development (R&D) $ invested by startup. Some considerations:

• New innovations with big markets: value of any new innovation hinges on market acceptance of product, how big market is, how market is growing, & ease of reaching customers
• Revolutionary products: “Does the large R&D investment result in an innovation that is revolutionary or evolutionary? If only slightly better version, investors don’t give much weight to your R&D invested $
• Significant barrier to entry: Does R&D investment result in significant barrier to entry, making it more difficult for competitors to duplicate your product?
• “Our version of the same thing:” When your R&D effort produces a version of something that already exists
• Innovation without a market: R&D funding was unfocused on solving a particular market need; less highly valued use of R&D $

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Pro tip: there are no pro tips

Sort of… you need to know how to assign significance to your victories, milestones, and other accomplishments to use risk mitigation effectively

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The VC “post-money” perspective: “How much of the company do I think I should get for my investment?”

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VC Quick Valuation Method

Shows how quickly an investor can size up your startup and their estimation of what your valuation “should be”

This method jumps to the answer with only a few inputs

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Why you need to know this method: Investors typically start with this one.

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VC Quick valuation, step by step

• How much money do you need for the next 18 months?
• Understand how much equity the VCs want
• Calculate the post-money valuation
• Subtract the investment amount to determine the resulting pre-money valuation

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VC Quick valuation, illustrated

• You need $3M to fund your operations for the next 18 months
• VCs want to own at least 20% equity in your venture; anything less is not worth the time; substantially more will be too dilutive for founders and existing shareholders
• Calculate the post-money valuation: $3M/20% = $15M post-money valuation
• Calculate the resulting pre-money valuation: $15M - $3M = $12M pre-money valuation (founder does reality ✅)

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VC Quick valuation considerations

• Developed product/service and paying customers
• Quality metrics
• Stable operations and complete team
• Funding needs are well understood
• Note also that this method assumes you’re raising new financing every 18 months
• Rule of Thumb: VCs look for 20% at Series A, less and it’s not worth the effort, more and too much dilution for you

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Pro tip: not useful for very early-stage startups

There are too many guesses, you can’t estimate your monthly burn rate, team is not filled out or stable, cost to acquire customers is still too high

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VC Valuation Method

Relies on a few financial assumptions while ignoring founder experience, customer traction, and milestone achievement (though they do consider these factors when deciding whether to invest or not)

Uses an ROI expectation to determine pre-money valuation

Your mindset: begin with your exit valuation in an ideal future

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Exit value → Desired ROI to present post-money → subtract investment to pre-money

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Use a traditional method to value a mature firm (P/E, P/R)

Use the exit value from the future and the ROI to determine the inferred present value (Post-Money $)

Use the basic valuation equation to determine pre-money from the inferred post-money value and investment amount

VC Valuation Method Overview

• Starts at the end and works backwards: e.g., acquisition or IP, then working backward to assumptions that must be true for this to happen
• Puts financial projections in play: annual revenues in year of startup’s exit and use of public company data such as P/E multiples
• Incorporates return on investment (ROI) expectations: If the VC doesn’t think the startup can achieve hurdle rate of 20X ROI, they won’t invest

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VC Valuation Method, step by step

1. Understand the equation
2. Estimate your exit value, e.g.,
1. Simple exit value estimation using industry trends
2. More complex value estimation using established multiples, e.g., price/earnings, price/revenues, etc.
3. Calculate post-money valuation (divide exit value by ROI)
4. Calculate pre-money valuation (subtract investment amount from post-money)
5. Calculate equity percentage owned by the investors (investment amount ÷ post-money)

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VC Valuation Method, illustrated

1. Understand the equation

Exit value (in 5-7 years)/Post-money valuation (now) = Desired ROI multiple

Now flip equation to solve for post-money valuation target

Exit value (in 5-7 years)/Desired ROI multiple = Post-money valuation (now)

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VC Valuation Method, illustrated

2. Estimate exit value: two ways

First way: simple exit with industry trends: startups on your space typically get acquired for 2x revenues. Assume $20M revs

Exit multiple (2x) X Exit Year Revenue ($20M) = Exit Value ($40M)

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VC Valuation Method, illustrated

2. Estimate exit value: two ways

Second way: More complex exit valuation using P/E multiples. Companies in your space have P/E ratios of 10; your EBIT are 16% of revenues (also known as return on sales); your Year 5 annual revenues will be $25M

ROS% (16%) X Exit Year Revs ($25M) = Earnings ($4M)

P/E (10) X Earnings ($4M) = Exit Value ($40M)

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VC Valuation Method, illustrated

3. Calculate post-money valuation

With exit value estimated, calculate what post-money would have to be NOW to meet investors’ desired ROI.

• Estimated exit value is $40M
• Investors expect 20X ROI

Exit Value ($40M)/ ROI (20) = Post-money valuation ($2M)

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VC Valuation Method, illustrated

4. Calculate pre-money valuation

Use the amount you are trying to raise to calculate pre-money valuation.

• You are trying to raise $500,000
• Target post-money valuation needs to be $2M

Post-$ valuation ($2M) - Investment amt ($500,000) = pre-$ valuation ($1.5M)

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VC Valuation Method, illustrated

5. Calculate equity percentage owned by investors

Divide investment amount by post-money valuation to get amount of equity owned by investor

• Investment amount is $500,000
• Post-money valuation is $2M

Investment amt ($500,000) / Post-$ valuation ($2M) = % investor equity (25%)

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VC Valuation Method, illustrated

Let’s sum up, shall we?

• You are raising $500,000 now
• Your pre-money needs to be $1.5M
• Your startup needs to get acquired for $40M

Any questions?

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VC Valuation Method considerations

One big assumption: If your pre-money valuation is based on the idea that you could get acquired for $40M in the future, and investors don’t believe this exit value, you have little room to negotiate (hint: don’t rely on just one method)

Understanding the VC mindset: Experimenting with this method lets you understand how VCs think about investments: Startup must be able to exit for X dollars in Y years, and VCs require 20X ROI. Break any part of this hurdle and VCs will not invest

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Option pool impact on valuation

Because institutional investors commonly require startup to establish stock incentive plan in the form of stock options (Why? So company will continue to grow through hiring future key employees)

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“True” Pre-Money Valuation

It’s the “effective valuation” or the “option pool shuffle” that refers to the effect on your pre-money valuation when you create a stock option pool out of the founder’s equity

Pre-money option pools come out of the founder’s equity - founders pay for the entire option pool out of the unissued but authorized shares (i.e., “your” money)

Post-money option pools come out the combined equity of the founders and investors after the round has been completed (good luck)

In practice, the first option pool at Series A is almost always pre-money; later option pools are created with dilution to existing shareholders to let the venture continue to hire the best employees

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Ruh Roh

You negotiate pre-money valuation of $2,000,000. Then the investors return a term sheet that says:

“The Company’s pre-money valuation includes a reserve 20% of its Common Stock shares, on a full diluted basis, to be available for future issuances to directors, officers, employees, and consultants”

The effect of this term sheet clause lowers your pre-money valuation by $400,000 of the negotiated pre-money value (20% X $2M = $400,000)

Therefore, True pre-money of $1,600,000 + Investment of $500,000 = True post-money valuation of $2,100,000

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How to deal with it

Agree on a higher pre-money valuation that offsets the impact of the pre-money option pool

For example, $2.4M pre-money with investment of $500,000 for 20% of company with requirement for pre-money option pool of 20% is:

$2.4M x 20% = $480,000; true pre-money is $1.92M

True pre-money of $1.92M + $500,000 investment = $2.42M (compared to $2.1M true post-money in previous example; you just earned $320,000!)

Create an option pool based on the post-money valuation and ownership picture

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But don’t cheap out on employee stock options

“Startups should give employees more stock. Value is created over many, many years. Founders certainly deserve a huge premium for starting the earliest, but probably not 100 or 200x what employee number 5 gets. Additionally, companies can now get more done with less people.

“As an extremely rough stab at actual numbers, I think a company ought to be giving at least 10% in total to the first 10 employees, 5% to the next 20, and 5% to the next 50. In practice, the optimal numbers may be much higher.

“One problem is that startups try to have very small option pools after their A rounds, because the dilution only comes from the founders and not the investors in most A-round term sheets. The right thing to do would be to increase the size of the option pool post-A round, but unfortunately this rarely happens—no one wants to dilute themselves more, and this leads to short-sighted stinginess much of the time.”

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Here’s where Google’s first 21 employees are now

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BusinessInsider.com

What’s in it for me? Deal proactively with the option pool dilution

• Position yourself for a fair pre-money valuation (think about your “true” pre-money)
• Your first hires and key employees you onboard after that will create the value you promised investors by fueling your growth - reward them!

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