Priced rounds: pre-money, post-money, and the share math

A priced equity financing sells new shares at a defined price per share. The transaction is described by two valuations and the investment amount.

• Pre-money valuation — the company's value before the new investment.
• Investment amount — the cash the investors put in.
• Post-money valuation — the company's value after the investment.

The relationship:

$\text{post-money} = \text{pre-money} + \text{investment}.$

Numerical example: pre-money $20M, investment$5M, post-money $25M. The new investors own$5M / $25M = 20$20M / $25M.

The structural identity. Investors own (investment / post-money) of the post-money company; existing shareholders own (pre-money / post-money). The two add to 100% as required.

A common confusion: when an investor says 'I'll put in $5M at a$20M valuation,' which valuation is it? The convention varies and matters: a $20M pre-money values the company at$20M before the round (resulting in $25M post-money, 20$20M post-money values it at $20M including the investment (resulting in 25$5M). The difference is 5 percentage points of dilution — substantial. Term sheets are explicit; conversational shorthand isn't.

Most VC term sheets quote pre-money. Most accelerator and angel checks have moved to post-money quoting because it removes ambiguity about pool expansion (covered next).

Once pre-money valuation, post-money valuation, and investment are agreed, the rest is mechanical.

Step 1: count fully diluted shares pre-issuance.

For example: 8,000,000 issued + 2,000,000 in option pool = 10,000,000 fully diluted pre-round.

Step 2: solve for price per share.

$\text{price per share} = \frac{\text{pre-money valuation}}{\text{pre-issuance fully diluted shares}}.$

With pre-money $20M and 10M shares: price per share =$20M / 10M = $2.00.

Step 3: solve for new shares issued to investors.

$\text{new shares} = \frac{\text{investment}}{\text{price per share}}.$

With $5M investment at$2.00 per share: new shares = $5M /$2.00 = 2,500,000.

Step 4: confirm the post-money math.

Total fully diluted post = 10,000,000 + 2,500,000 = 12,500,000. Investors own 2,500,000 / 12,500,000 = 20%. Pre-money valuation of remaining 80% = $25M × 0.80 =$20M. Consistent.

Pool expansion changes the math. If the term sheet requires the option pool to be expanded pre-money from 2M to 3M shares (to 15% of post fully diluted), then 1M new pool shares are added before computing price per share. Pre-issuance fully diluted becomes 8M + 3M = 11M; price per share = $20M / 11M =$1.818; investor shares = $5M /$1.818 = 2,750,000; total post = 13,750,000; investor ownership = 20% (as agreed). Existing shareholders go from 80% on the old basis to (8M + 3M existing × some - pool to founders/employees)... the founders and old investors collectively bear the pool dilution before the new investor's purchase.

Combining the prior pieces into a worked example. Starting cap table:

Now raise a Series A: $5M at$20M pre-money, with the option pool expanded to 15% of post fully diluted.

Post fully diluted target: investors at 20%, pool at 15%, existing at 65%. To get the pool to 15% post, new pool shares must be added pre-money. Solve algebraically:

• Post fully diluted shares = $S_{\text{post}}$. Pool post-round = $0.15 \cdot S_{\text{post}}$.
• Investor shares = $0.20 \cdot S_{\text{post}}$.
• Existing issued shares (founder + seed) = $0.65 \cdot S_{\text{post}} - (\text{pool})$... this gets tangled.

The standard solution: solve for $S_{\text{post}}$ implicitly by requiring (existing issued shares) = $(1 - \text{investor share} - \text{pool share}) \cdot S_{\text{post}}$.

Existing issued = 8M (founder + seed); $(1 - 0.20 - 0.15) = 0.65$; so $S_{\text{post}} = 8M / 0.65 = 12.308M$.

From there: pool post-round = 1.846M, investor shares = 2.462M, price per share = $5M / 2.462M =$2.031.

Final cap table:

The founder went from 60% to 48.75% — a dilution of 11.25 percentage points from a round that nominally sold 20% to investors. The extra dilution funded the pool expansion.

Preferred shares come with a liquidation preference: a guaranteed payout to preferred shareholders in a liquidation event (acquisition, dissolution, sometimes IPO under specific terms) before common shareholders receive anything.

The standard structure: 1× non-participating preferred. The investor receives the greater of (a) their original investment back or (b) what they would receive if they converted to common stock and shared pro-rata.

In the prior example, the Series A investor invested $5M. In an acquisition for:

• Below $5M / 0.20 =$25M: the investor takes the $5M preference; common shareholders divide the remainder.
• Above $25M: the investor is better off converting to common and taking 20% of the sale price.

Liquidation preferences become consequential when the sale price is below the post-money valuation — a 'down exit.' Preferred holders are protected; common holders absorb the loss. The next lesson on term-sheet anatomy goes into participation, multiples, and seniority structures that determine how aggressive the preferences are.

The structural point at the cap-table level: ownership percentage tells you what fraction of the upside a holder captures; liquidation preferences tell you the downside protection the preferred holders have. The two are different aspects of the same investment. A 20% stake with a 1× non-participating preference behaves like 20% upside-only; with a 2× participating preference it behaves quite differently in any moderate exit.

Anti-dilution provisions adjust a preferred shareholder's effective ownership if the company subsequently issues shares at a lower price (a 'down round'). Without anti-dilution, the preferred shareholder is diluted just like everyone else; with anti-dilution, they receive additional shares (or an adjusted conversion ratio) to compensate.

Full ratchet is the most aggressive form. The preferred shareholder's effective price per share is reduced to the new (lower) round price, retroactively.

Example: an investor bought 1,000,000 preferred shares at $2.00 per share (total$2M investment). A later round prices at $1.00 per share. With full ratchet, the investor's effective price is reset to$1.00; they receive enough additional shares so that their total shares = $2M /$1.00 = 2,000,000 — double their original stake.

The additional shares come at the expense of other shareholders. Full ratchet is therefore extremely founder-unfriendly and is rare in venture deals today. It appears occasionally in:

• Late-stage rounds with weak company position.
• Distress financings where new investors demand strong protection.
• Private-equity buyouts of public companies.

When present, full ratchet can compound badly: a down round triggers anti-dilution; the resulting dilution to common reduces the company's value to common holders; subsequent rounds price lower (because common is worth less); more anti-dilution triggers. This is the so-called 'death spiral' that founder protections aim to prevent.

Weighted-average anti-dilution is the standard alternative, much more common in modern term sheets. It adjusts the conversion price (and therefore the effective share count) using a formula that weights the dilution by how much new equity was issued at the lower price.

The formula:

$\text{new conversion price} = \text{old conversion price} \times \frac{A + B}{A + C}$

where:

• $A$ = total shares outstanding before the dilutive issuance.
• $B$ = shares that would have been issued at the original (higher) price for the new capital raised.
• $C$ = actual shares issued at the new (lower) price.

Weighted average can be broad-based (A includes all common, preferred, options, warrants) or narrow-based (A includes only common and preferred, not options). Broad-based is more founder-friendly; narrow-based is more investor-friendly.

A numerical example: original conversion at $2.00, 10M total shares outstanding before the dilutive issuance. A$2M down round at $1.00/share issues 2M shares.

• $A = 10M$.
• $B =$2M / $2.00 = 1M (what would have been issued at the old price).
• $C = 2M$.
• New conversion price = $2.00 × (10M + 1M) / (10M + 2M) =$2.00 × 11/12 = $1.83.

The original investor's effective shares rise modestly (from $X /$2.00 to $X /$1.83), not all the way to $X /$1.00 as full ratchet would do. The 'penalty' for the down round is distributed across all parties rather than concentrated on common.

Most modern term sheets use broad-based weighted average. It is investor protection against down rounds without creating the death-spiral dynamics of full ratchet.

A down round is a priced round at a lower valuation than the previous round. They became common in the 2022–2024 period after the 2020–2021 ZIRP-era valuations needed to be adjusted to subsequent market conditions, and recur in any post-bubble or post-shock period.

Down rounds have structural consequences:

• Anti-dilution triggers. Previous-round preferred shareholders may receive additional shares depending on their anti-dilution provisions.
• Employee morale. Strike prices on options issued at the higher valuation now exceed the new common-stock value. Some employees may exercise and immediately have underwater options.
• Existing investor signaling. A lead investor that does not participate signals lack of confidence; new investors take note.
• Pay-to-play provisions sometimes appear: existing investors who do not participate in the down round lose some of their preferred rights (e.g., conversion to common).

A recapitalization is a structural cleanup that can accompany a deeply troubled round. The company adjusts the cap table — converting some preferred to common, refreshing the option pool, sometimes wiping out subordinated preferred — in exchange for new capital. Recaps are deeply dilutive to existing holders but can save a company that would otherwise fail.

Structured rounds — also called 'dirty deals' — combine investment with very investor-friendly terms (high liquidation preferences, ratchets, board changes) to bridge to a recovery. They preserve the headline valuation but can leave common shareholders with very little even in a successful exit.

Reading a 'flat' or 'up' round in a difficult environment requires checking the term sheet, not just the valuation. A flat round with onerous preferences can be worse for common than a clean down round.

Three structural points for the cursus.

• The pre-money/post-money math is mechanical. Once both valuations and the investment are set, the rest is arithmetic — price per share, new shares, ownership percentages, pool refresh. The negotiation lives in the valuations and the structure (pool size, anti-dilution, preferences), not the algebra.
• Pool expansion is real dilution that lives entirely on existing shareholders. The 'option-pool shuffle' makes the headline investor share understate the founder's actual dilution.
• Anti-dilution protection makes down rounds asymmetric. Without it, all shareholders share down-round pain. With weighted-average, the impact is spread; with full ratchet, the impact is concentrated on common holders, sometimes producing death spirals.

The next lesson moves from the math of priced rounds to the unique mechanics of convertible instruments — SAFEs and convertible notes — which are how many of the earliest investments are structured and which convert at later priced rounds via formulas that produce their own dilution math.