I know the numbers are small, but you get the point!

The second point you raise is interesting. There are counteracting effects there. I wonder whether anyone has done a study of the effects on founders’ returns.

In response to the other comments, somewhat counter intuitively, higher valuations can leave founders with nothing. Usually the higher the valuation, the more likely investors are inclined from the start to shoot for the moon. Even if the company is successful, there will be a lot more capital raised a long the way; the resulting dilution may not work out for the founder any better than a lower price on the first round and greater capital efficiency.

The point of the article is true–pre-money (true or not) is absolutely not the sole variable to optimize on.

Yes, I’m Bulgarian.

Let me address your points first:

1. Your statement that entrepreneurs should always try to get higher pre-money valuation is not great advice for two reasons

1.1. Pre-money typically includes an option pool. Given the same raise amount, would you prefer a $5M pre with $4M option pool or a $4M pre with a $2M pool. Not sure about you, but I’ll go with the $4M deal in almost all cases. The anti-dilution effect of a large option pool cannot compensate the additional founder dilution of case one.

1.2. Perhaps you were referring to true pre-money (the founders’ stake) as opposed to just pre-money (which includes the option pool). Even then, entrepreneurs should absolutely not go on valuation alone. Valuation alone is the guide only if everything else is the same (pool, raise, terms). I mention this in the article. However, when other things are not equal, you have to start making the types of comparisons this article is about.

2. In my experience as both an entrepreneur and and VC I haven’t found VCs “lying” with numbers. Most are happy to share a spreadsheet with their financing model. Not sure how one can “lie” in this case as both numbers and formulas are there for everyone to see. If you are referring to spin, however, I’m 100% with you. Not all but some VCs exploit the informational advantage they have with respect to entrepreneurs. They don’t spend enough time educating entrepreneurs about the process and about the terms, math and consequences of what’s happening. At the same time, entrepreneurs are not interested/focused-enough to learn about this. Time and time again I’ve found entrepreneurs not sufficiently curious about the business models of venture firms and the intricacies of financings.

3. I’m not sure what you are referring to with respect to Polaris. For the record, I’ve long left the firm and am currently with FastIgnite. If you want to chat with me privately about something that happened, shoot me an email. Contact info is at http://fastignite.com/about.

As for the numbers, I can certainly have a bug in the calculator. Will look more closely at it today. But I’m afraid you may be misunderstanding the concept of the execution multiplier (or I’m not clear about your math). The execution multiplier applies not to the total amount of capital raised but to the delta ($500K in the example). Perhaps we should chat on the phone?

Let’s assume a 100% multiplier

In Case 1 the “Future” value of the company will be $10.5M ($7.5M post-money plus $3M execution “value-add”), of which Founders will own 35%. Thus the value of their holding will be 0.35×10.5M= $3.675M

In case 2 the Future value of the co. will be $11.277M ($7.777M post-money + execution bump of $3.5M), of which the Founders will own 30%. Thus the value of their holding will be 0.30×11.277M= $3.38M

$3.675M > $3.38M

Now let’s look at the VCs. In case 1 their future holding will be valued at 0.4×10.5M= $4.2M, and in case 2 it will be valued at 0.45×11.277M= $5.07M

Case 1 is better for Founders, Case 2 is better for VCs.

Summary:

1.Always, ALWAYS, try to get higher pre-money valuation.
2. Many VCs lie with numbers.
3. #2 is especially true if the VC is with Polaris (see GreenFuel Technologies, Inc.)

Kathi, thanks, I appreciate it.

We posted the link to the article on our Blog and also sent it off via email to clients we know are raising money.

Thank you, Sim, from all of our early-stage clients and prospects winding their way through this confusing labyrinth