A guide for company owners and managers · Valuation
How a company is valued when an investor comes in
How a company’s value is set during an investment and what the conditions an investor puts on the table really mean. Two inseparable worlds: the number (what the company is worth) and the terms (the rules under which the investor comes in).
Valuation and the term sheet always go together. Valuation answers “what is the company worth” — it’s the result of a method and negotiation rather than an exact truth. The term sheet is a non-binding summary of the deal’s terms; its economic and control clauses often affect your real return more than the valuation number itself. This is an educational overview, not legal or investment advice — always discuss a specific deal with a lawyer and advisor.
This guide was prepared by ROSTEON s.r.o. as an orientation resource for company owners and managers. It helps you get oriented quickly and does not replace legal, tax, accounting or investment advice. Always discuss a specific deal and its terms with a qualified lawyer and advisor who knows your situation.
What “valuation” really is
BasicsValuation is the agreed value of a company, used to calculate the stake an investor gets for their money. The key thing to grasp is that it is not an objective truth — it’s a number the two sides agree on. Valuation methods provide a framework and arguments, but the final number is the result of a negotiation between what you ask for and what the investor is willing to pay.
For young companies without profits, valuation is more art than science — it leans on the market, the team, traction and comparable deals. For mature, profitable companies it can be anchored far more precisely in numbers (profit, cash-flow, assets). So there’s no single correct method; several are used at once and a reasonable range is sought.
A high valuation sounds like a win, but the term sheet can “eat” it. An investor may agree to your high valuation in exchange for tough terms (e.g. a multiple liquidation preference) that shift money to them when the company is sold. So never look at the number alone — look at the number and the terms together.
Pre-money vs. Post-money
MechanicsThis is the most important pair of terms in all of valuation and a source of many misunderstandings. Pre-money is the company’s value before the investment. Post-money is the value after the investor’s money is added. The difference between them is exactly the size of the investment.
Example: pre-money €2,000,000 · investment €500,000
The investor puts in €500,000 at a post-money of €2,500,000, so they get 500,000 / 2,500,000 = 20 %. Founders are diluted from 100 % to 80 %. Had the same €500,000 been agreed as a post-money (not pre-money) of €2,000,000, the investor would have received 25 % and dilution would have been larger — so always clarify whether a number is pre- or post-money.
When an investor says “we’ll value it at two million”, always ask: pre-money or post-money? For the same investment the difference in your stake is several percent. And watch the option pool — if a new employee share pool is to be created as part of the deal, it is usually counted into pre-money, which dilutes the founders, not the investor.
Valuation methods
ToolsNo method is “the right one”. Depending on a company’s maturity and available data, several approaches are combined. Below are the most common — from those for mature companies with numbers to those for early companies without profits. In practice the result isn’t stated as a single number but as a value range derived from several methods; the specific point within the range is then a matter of negotiation.
Multiples
You derive value by multiplying a financial metric by a market multiple from comparable companies.
DCF — discounted cash-flow
You sum a company’s future free cash-flows and discount them to present value at a discount rate.
Book / asset-based
Value = the company’s net assets (assets minus liabilities). More a floor than a real market price.
Comparable deals
You look at the valuations at which similar companies at a similar stage raised capital, and estimate from them.
Scoring methods
Structured estimates (e.g. scorecard or Berkus) rate team, market, product and traction against an average.
Target-return method
The investor back-calculates today’s valuation from the return (e.g. 10×) they expect at a future exit.
What drives value up and down
DriversMethods are the framework, but these factors move the actual number. Understanding which levers raise and which lower the valuation gives you arguments in the negotiation.
Revenue growth and traction
Fast, demonstrable growth is the strongest argument. An investor pays for the future, not the past.
Market size
A large addressable market means room for a large return — key especially for VC logic.
A strong team
Experienced founders with a track record lower perceived risk, which raises willingness to pay more.
Recurring revenue and margins
Predictable, profitable income is valued higher than one-off or low-margin revenue.
Competitive advantage
Patents, brand, network effects or entry barriers protect future profits and raise value.
Concentration risk
Dependence on one customer, supplier or person raises risk and pushes the valuation down.
Weak documentation
Messy accounting, contracts or cap table lowers trust and valuation — or kills the deal.
An unfavorable market
When capital is scarce (higher rates, cautious investors), valuations fall across the market.
Low bargaining power
If you urgently need capital and have no alternatives, the investor knows it and the valuation reflects it.
Anatomy of a term sheet
TermsA term sheet is usually a non-binding summary of the key terms of an investment (the exceptions tend to be the exclusivity and confidentiality clauses, which are binding). It splits into two worlds: economic terms (who gets how much) and control terms (who decides what). How binding each clause is depends on the governing law and the specific wording — what follows draws on common international (mainly US) practice, which is a reference point but can differ locally. Click a clause for detail.
On a first read of a term sheet, focus on three things that most affect your outcome: the liquidation preference (how much and at what multiple the investor receives ahead of you on a sale), board composition (whether you keep control of decisions) and anti-dilution (how the investor is protected if a later round is cheaper). The valuation number is only fourth in order of importance.
Glossary
ReferenceValuation
The agreed value of a company, used to compute the investor’s stake. Not an objective truth — the result of a method and negotiation.
Pre-money value
The company’s value before the investment is added. It sets the stake an investor gets for their money.
Post-money value
Pre-money + investment. The investor’s stake = investment ÷ post-money.
Capitalization table
An overview of who owns what share. It changes after each round — always model it including the pool and preferences.
Dilution
The drop in your % stake when new shares are issued. Not always bad — a smaller share of a bigger company can be more.
EBITDA
Earnings before interest, taxes, depreciation and amortization. A common metric for multiple-based valuation of mature firms.
Enterprise Value
The value of the whole enterprise (including debt, excluding cash) — as opposed to the value of equity alone.
Down round
A round at a lower valuation than the previous one. It triggers anti-dilution protection and signals a problem.
Liquidation preference
The investor’s priority claim on proceeds in a sale. 1× non-participating is fairest for you.
Term sheet
A non-binding summary of the deal’s terms (except no-shop and confidentiality). The basis for the final agreements.
Due diligence
An in-depth review of the company by the investor before closing (finance, law, contracts, technology).
Option pool
A block of shares for employees. Where it sits in pre/post-money determines whom it dilutes.
Sources and further reading
ReferencesThis overview draws on established venture-capital practice and publicly available data analyses of term sheets. Market standards (e.g. the prevalence of a 1× non-participating preference) are backed by data from the sources below, but they change over time and by jurisdiction. Before a specific deal, verify the current state with a lawyer.
HOW A COMPANY IS VALUED WHEN AN INVESTOR COMES IN · A GUIDE FOR COMPANY OWNERS AND MANAGERS · © ROSTEON s.r.o. · v1.0 — An orientation overview, not legal, tax or investment advice. Consult a specific deal with a qualified lawyer and advisor.