[nadam]

Can someone point to a link which explains the math of startup fund raising? I was thinking about it, and what I get is a paradox:

I assume the definition of raising money is that the original owner gives some percentage of the company to a new owner, and the new owner gives an amount of money to the company.

Let's say the company's valuation is 1 million dollars. Let's say the owner sells 10% for 0.1 million dollars.

In a perfect market the company's new valuation is obviously 1.1 million dollars: the original value in the company's resources (people, etc...) plus the 0.1 million in the bank.

On the other hand in a perfect market perfect owners made a deal in which the original owner's wealth is the same before and after the deal.

Before the deal he was worth 1million. After the deal he is worth 0.9*x, where x is the new valuation of the company.

So:

1million dollars = 0.9x

x = 1.1111' million dollars

So which is the correct new valuation: 1.1, or 1.1111'? Or something different?

Maybe the deal have to be made in infinitely small pieces, so the result is coming from some kind of differential equation?

[ganeumann]

The money buys new shares in the company. Think about it in per share terms. In your example:

- Pre-money there are 1,000 shares, valued at $1,000 each

- The company sells 100 new shares for $1,000 each

- Post-money there are 1,100 shares

So after selling 100 shares, the original owner now owns 1,000/1,100 shares = 90.9%. The new valuation is 1,100 shares * $1,000/share = $1,100,000.

[nadam]

Now everything is clear, thanks!

[pisarzp]

You confused a little bit pre-money and post-money valuation.

If company is worth 1m, and someone invests 100k, they get 0.1/(1+0.1) (current value of company + additional $100k after investment) worth of shares, what gives investor c. 9% of shares.

Founder now has 91% of shares, what still give him $1m. (91% x $1.1 = $1m)

[harryh]

The fact that selling a portion of your ownership (so the cash goes in your pocket) is different from your company raising an investment (so the cash goes in the company's bank account) is the source of your confusion.

[sdpurtill]

All your questions can be answered in the Transparent Term Sheet from Founders Fund: http://foundersfund.com/termsheet

It has a calculator that provides economic breakdowns and a supporting article defining the key terms of a term sheet.

[kken]

>In a perfect market the company's new valuation is obviously 1.1 million dollars.

Why? It is still 1 million dollars. The only difference is that the owner now owns 0.9M$ worth of company shares and 0.1M$ cash.

[nadam]

I thought the money goes to the company, not the original owner. I think this is what pg suggested in the article.

[fragsworth]

If a company owns cash, and you own a percentage of that company, it is not really different from owning a percentage of that cash.

The rest of the company still has the same value, plus some (unclear) amount from having successfully raised money.