Before publishing a share price or ownership percentage, make sure your team can reproduce the calculation. The inputs should agree with the company’s records and the proposed transaction.
A cap table records who holds the company’s securities and related ownership information. Dilution occurs when issuing new shares reduces an existing holder’s percentage ownership. The SEC glossary explains these concepts and distinguishes valuation before a financing from valuation after it.
Pre-money and post-money describe different points in the round
For a simple primary equity financing with no other changes, post-money equity valuation equals pre-money equity valuation plus the new investment. This arithmetic does not establish the fair value of the business or guarantee what anyone could receive in a sale.
Use explicit assumptions. The examples below assume one class of common stock, no debt conversion, options, warrants, fees paid in shares, or other concurrent transactions. They illustrate ownership calculations, not recommended valuations.
Example: a $2 million raise at an $8 million pre-money valuation
Fictional Alder Robotics has 8 million outstanding common shares. The founders own 6 million and earlier investors own 2 million. At an $8 million pre-money equity valuation, the example’s price is $1 per share.
New investors contribute $2 million and receive 2 million shares. There are now 10 million shares outstanding, and the post-money valuation is $10 million.
| Holder group | Shares before | Ownership before | Shares after | Ownership after |
|---|---|---|---|---|
| Founders | 6,000,000 | 75% | 6,000,000 | 60% |
| Earlier investors | 2,000,000 | 25% | 2,000,000 | 20% |
| New investors | 0 | 0% | 2,000,000 | 20% |
| Total | 8,000,000 | 100% | 10,000,000 | 100% |
The founders retain the same number of shares but own a smaller percentage. Under the financing’s assumed price, that does not mean the shares necessarily have a lower implied value. A change in percentage and a change in investment value are different questions.
What if $8 million means post-money instead?
With the same $2 million investment and an $8 million post-money valuation, the implied pre-money valuation is $6 million. New investors receive 25% rather than 20%, assuming the same simplified structure.
That is why “we are raising at an $8 million valuation” is incomplete. State whether the figure is pre-money or post-money, what capitalization basis is used, and which transactions the calculation includes.
How do you translate an investment amount into shares?
In the first example, an investor paying $10,000 at $1 per share receives 10,000 shares. After the full $2 million raise, those shares represent 0.1% of the 10 million shares outstanding.
The same share purchase can represent a different percentage if the company raises a different amount or issues other shares. Describe any percentage with its assumed closing scenario and denominator. Be clear about whether a percentage refers to issued shares, an as-converted calculation, or a fully diluted calculation.
Add convertible instruments and options explicitly
SAFEs and convertible notes can affect the shares issued in a later financing. Their triggers and terms differ, as the SEC’s securities overview explains. An option pool increase can also affect the agreed capitalization calculation.
Give counsel the actual instruments and model each one under its terms. A valuation cap is not automatically the current company valuation, and one SAFE’s conversion formula should not be copied onto another instrument without review.
Maintain separate views for outstanding ownership and hypothetical future conversion. Label unissued shares, reserved shares, and assumptions so a model is not mistaken for the current legal ownership record.
Ownership percentage does not capture every right
Preferred stock, voting arrangements, and contractual rights can change outcomes that a simple share-count table does not show. Explain those terms alongside the percentages.
Also distinguish percentage ownership dilution from the net tangible book value dilution disclosure used in some offering documents. Form 1-A contains specific dilution disclosure requirements; the illustrative cap table here does not replace that analysis. See Form 1-A.
Before launch, reconcile the approved share count with finance and counsel, confirm sufficient authorized securities and required approvals, and name the person responsible for updating the ownership record after each closing.
How Issuance fits
Issuance’s dashboard and data exports help your team reconcile investments and pass records to the person or provider responsible for ownership records. Confirm the required fields and handoff during platform setup.
Your company and its advisers determine valuation, security rights, and capitalization. The offering page and checkout should reflect the reviewed terms, while the designated ownership-record provider maintains the authoritative record.