You're raising a $2M seed round. The VC says they'll invest at a "$10 million valuation." But wait—is that pre-money or post-money? The answer changes your ownership by 20%.

This distinction trips up first-time founders constantly. It seems like a technicality, but it's actually one of the most important numbers in your term sheet. Let's clear it up.

The Basic Definitions

Pre-money valuation is what your company is worth *before* the investment goes in.

Post-money valuation is what your company is worth *after* the investment goes in.

The relationship is simple:

Post-Money = Pre-Money + Investment Amount

Or rearranged:

Pre-Money = Post-Money - Investment Amount

Why It Matters: The Math

Let's say you're raising $2M. Here's how the two scenarios play out:

Scenario A: "$10M Pre-Money"

• Pre-money valuation: $10M
• Investment: $2M
• Post-money valuation: $12M
• Investor ownership: $2M ÷ $12M = 16.7%
• Founder ownership (after round): 83.3%

Scenario B: "$10M Post-Money"

• Post-money valuation: $10M
• Investment: $2M
• Pre-money valuation: $8M
• Investor ownership: $2M ÷ $10M = 20%
• Founder ownership (after round): 80%

Same "$10M valuation." Same $2M investment. But Scenario B gives away 20% more equity to investors (20% vs 16.7%).

On a $10M valuation, that's a $330K difference in the value of the shares you're giving up. As valuations and round sizes grow, this gap becomes massive.

How to Calculate Ownership

The formulas are straightforward:

Investor Ownership % = Investment Amount ÷ Post-Money Valuation

Founder Ownership % = Pre-Money Valuation ÷ Post-Money Valuation

Let's say you're raising $3M at a $12M pre-money:

• Post-money = $12M + $3M = $15M
• Investor ownership = $3M ÷ $15M = 20%
• Existing shareholders keep = $12M ÷ $15M = 80%

Which Number Should You Negotiate?

Most sophisticated investors quote pre-money valuation, and that's what you should negotiate.

Why? Because pre-money is the value of *your* company—what you've built before their capital comes in. It's a cleaner measure of what the investor thinks you're worth.

Post-money depends on the round size, which can vary. If you negotiate a $10M pre-money valuation, you know your stake's value regardless of whether you raise $1M or $3M. Post-money keeps shifting as the round size changes.

That said, always clarify. When a VC says "$10M valuation," ask: "Is that pre-money or post-money?" Never assume.

The Option Pool Shuffle

Here's where it gets trickier. Many term sheets include an option pool provision that allocates equity for future employee stock options.

VCs typically want this option pool created (or expanded) *before* their investment—meaning it comes out of the pre-money valuation, diluting existing shareholders rather than new investors.

Example: The Option Pool Impact

You negotiate a $10M pre-money for your $2M raise. Seems good. But the term sheet includes a 15% option pool to be created pre-investment.

What's really happening:

Let's recalculate ownership:

• Total post-money: $12M
• Investor: $2M ÷ $12M = 16.7%
• Option pool: 15%
• Existing shareholders: 100% - 16.7% - 15% = 68.3%

Without the option pool, you'd keep 83.3%. With it, you keep 68.3%. That 15% option pool cost you 15% of your company.

How to Handle Option Pool Negotiations

1. Size it appropriately: Push back if the pool seems too large. A 10% pool might cover 2 years of hiring; 20% might be overkill.

2. Negotiate for post-money option pools: Some founders successfully negotiate for the option pool to come out of post-money, sharing dilution with investors. This is harder to get but worth asking.

3. Use your existing pool: If you already have an option pool with unused shares, negotiate to use that rather than creating a new one.

4. Tie it to a hiring plan: Show the VC a realistic hiring plan and the options needed to execute it. This justifies a smaller pool.

SAFEs and Convertible Notes: A Wrinkle

SAFEs (Simple Agreement for Future Equity) and convertible notes add complexity because they convert at a future round's valuation—often with a valuation cap and/or discount.

Valuation Cap Example

You raise $500K on a SAFE with a $5M valuation cap. Later, you raise a Series A at $15M pre-money.

The SAFE investor converts at whichever is better for them:

• The cap ($5M), or
• The Series A price minus their discount

Since $5M < $15M, they convert at the $5M cap, getting significantly more equity than Series A investors.

Effective ownership:

• SAFE converts as if the pre-money were $5M (not $15M)
• SAFE investor ownership: $500K ÷ ($5M + $500K) = 9.1%
• But they got this at a round where others are paying $15M+ pre-money prices

This is why valuation caps are so important. A "low" cap might seem fine when you're desperate for seed funding, but it becomes very dilutive when your Series A comes in at a much higher valuation.

Common Mistakes Founders Make

1. Confusing Pre and Post-Money

This changes your dilution by the round amount divided by post-money. Always clarify.

2. Ignoring the Option Pool

A "$10M pre-money" with a 20% option pool is really an $8M pre-money for existing shareholders.

3. Focusing Only on Valuation

Terms matter as much as price. Liquidation preferences, anti-dilution provisions, and board seats can impact your economics more than a 10-15% valuation difference.

4. Setting Caps Too Low on SAFEs

That $3M cap seemed fine for a $500K raise. But when you raise Series A at $20M, early investors own huge chunks of your company.

5. Not Modeling Future Dilution

Your 60% ownership after seed will become 35% after Series A and 20% after Series B. Model out multiple rounds to understand where you'll end up.

Quick Reference Table

Key Takeaways

• Pre-money = company value before investment; Post-money = value after investment
• Post-Money = Pre-Money + Investment Amount
• Investor ownership % = Investment ÷ Post-Money
• Always clarify whether a quoted valuation is pre or post-money
• Option pools created pre-money dilute founders, not new investors
• SAFE valuation caps set the effective pre-money for conversion

The pre-money vs post-money distinction isn't just terminology—it directly determines how much of your company you give away. Get comfortable with this math before your next fundraising conversation.