How to value a startup when raising investment

Unlike a conventional company, an early-stage startup isn't valued using a single formula. A startup often has neither revenue nor profit, so its value is made up of the team, the market, its progress and what investors are willing to believe in. Let's figure out how to approach this.

First, two concepts. Pre-money is the company's valuation before the investment, and post-money is its valuation after. If an investor puts in money, their share is calculated as the investment amount divided by the post-money valuation. The higher the valuation, the smaller the share you give away for the same money.

Now the methods. For companies without revenue, two simple ones are used most often. The Berkus method evaluates five risk-reducing factors: the idea, the prototype, the team, relationships and first sales. Each one adds part of the value. The Scorecard method compares your startup with the average valuation of similar companies in the region and adjusts it by weights: team strength 30%, size of the opportunity 25%, product 15%, competitive environment 10%, sales channels 10%, need for additional investment 5% and other 5%.

The third method is the investor's own perspective: the VC method. It works backward: you estimate what the company could be worth at exit in 5–7 years, then divide that by the expected return multiple, which for early stages is often 10–25x, adjusting for dilution in future rounds. At later stages, a comparison with similar deals on the market is added. Practitioners advise not relying on a single method but comparing the results of two or three.

Now an example. In 2004, Peter Thiel invested $500,000 in Facebook for 10.2%. It was the company's first outside investment, and it valued Facebook at about $4.9 million. A simple check: divide 500,000 by 4.9 million and you get about 10%. Today this calculation looks naive, but the principle is the same.

Two more practical points. First, valuation is a negotiation. Practitioners advise talking to five to ten investors before naming a price: the market itself will show you what it thinks. Second, a valuation that is too high is also harmful, because in the next round you will have to prove growth, while one that is too low gives away too large a stake, and this adds up from round to round. The benchmark cited for the seed stage is giving away 15–20%.

And a separate note on YC: the accelerator doesn't negotiate valuation. The standard deal is $500,000: $125,000 on a post-money SAFE for 7% and another $375,000 on an uncapped SAFE.

The main trap for first-time founders is confusing the valuation before the money comes in with the valuation after.

• Pre-money valuation — the company's value before it receives investment (an assessment of its assets, team and ideas at the present moment).
• Post-money valuation — the company's value immediately after the money arrives in its account.
• The formula linking them:
• Post-money = Pre-money + Investment amount
• Calculating the investor's share:
• Investor's share = Investment amount / Post-money

Example: If you have agreed with an investor on a pre-money valuation of $4,000,000 with an investment of $1,000,000:

• Post-money = $4,000,000 + $1,000,000 = $5,000,000.
• Investor's share = $1,000,000 / $5,000,000 = 20%.

Valuation methods cheat sheet

The Scorecard method

It is used to compare your startup with the average figures of similar companies in the region.

Calculation algorithm: Take the average valuation of early-stage companies in your market (for example, $3,000,000) and multiply it by the final coefficient (the sum of the weights of each factor relative to the overall average, where average = 1.0).

Founder's checklist before meeting an investor

• Study the market: Find out the median valuations and check sizes for your stage (pre-seed / seed) in your region over the last 6 months.
• The range rule: Never be the first to name a fixed number. Name a range (for example, a pre-money of $3M to $4M).
• Healthy dilution: Remember the target benchmark for the seed stage — giving away a total of 15–20% of the company.
• Avoid extremes: Too high a valuation will create inflated expectations for the next round, while too low a valuation will lead to early dilution of the founders' stake.

Sources:

1. WaveUp — Startup Valuation Methods: 8 Approaches Compared
2. VC Beast — How to Value a Startup: Methods Investors Use
3. Hakaru — Startup Valuation Methods: How VCs Value Early-Stage Companies
4. Papermark — Data Room for YC Startups
5. Nasdaq/RTTNews — Peter Thiel and Facebook