How to decode valuation math before signing a term sheet

You’ve got investor interest, the conversation is flowing, and then comes the big question: what’s the company worth? Valuation and investment amount are the first headline numbers in any term sheet, and the most emotionally charged. The numbers determine not just how much money comes in, but also how much ownership you give up and how future rounds will play out.

Here’s a clear breakdown of how valuations work in term sheets, what “pre-money” vs. “post-money” really means, why “fully diluted” matters, and how to avoid the common traps.

What does valuation actually mean?

Valuation in a term sheet is simply the agreed-upon price tag for your company at the time of investment. It sets the framework for how much equity the investor receives in exchange for their cash.

• Pre-money valuation = your company’s value before the new investment.

• Post-money valuation = pre-money valuation + the new investment.

Think of it like this: pre-money is what the founders and existing shareholders think the company is worth; post-money is the new reality once fresh capital is in the bank.

How is pre-money valuation calculated?

Pre-money valuation is usually calculated by multiplying the price per share by the total number of shares outstanding (often on a fully diluted basis).

Example:

Agreed price per share: CHF 5.00

Total shares outstanding before investment: 1,000,000

Pre-money valuation = 1,000,000 × 5.00 = CHF 5,000,000

When an investor commits CHF 1,000,000 at CHF 5.00 per share, they receive 200,000 new shares. This creates a post-money valuation of CHF 6,000,000 (1.2M shares × CHF 5.00).

Key point: the share price and the share count (especially if an ESOP expansion is included) drive the pre-money valuation. Founders should always confirm which share base is being used in the calculation.

A simple case

Imagine your startup is valued at CHF 5 million pre-money. An investor offers CHF 1 million.

• Pre-money: CHF 5M

• Investment: CHF 1M

• Post-money: CHF 6M

The investor’s stake = 1M ÷ 6M = 16.7%.

Sounds straightforward. But here’s where it gets tricky: how do you count the total number of shares?

Fully diluted: the hidden denominator

Valuation is almost always calculated on a fully diluted basis. That means the investor isn’t just looking at today’s outstanding shares. They’re looking at all the shares that could exist if options, warrants, convertibles, or promised employee stock are exercised.

Example:

• Outstanding shares today: 1,000,000

• New ESOP pool created: 200,000 options

• Investor buys: 200,000 shares

On an outstanding-only basis:

• Investor = 200,000 ÷ 1,200,000 = 16.7%

On a fully diluted basis (with ESOP included pre-investment):

• Total = 1,200,000 + 200,000 investor shares = 1,400,000

• Investor = 200,000 ÷ 1,400,000 = 14.3%

That’s a 2.4% swing just from including the option pool. And in most term sheets, investors require that the ESOP is counted before they invest which means the dilution falls mainly on the founders.

Tips for founders

1. Always clarify pre vs. post.

A “CHF 5M valuation” means very different things depending on whether it’s pre-money or post-money. Never assume, simply ask.

2. Watch the ESOP pool.

If the option pool is added before the investment, the dilution hits you, not the new investor. Negotiate whether the pool is included pre- or post-money.

3. Do the fully diluted math.

Don’t just look at the round headline. Run the numbers with all options, convertibles, and warrants included.

4. Don’t get blinded by the valuation number.

A higher valuation feels great, but it sets expectations for the next round. If you can’t show growth that supports it, you risk a painful down round.

5. Ownership matters.

Ask yourself: after this round, do we still own enough to stay motivated through the next one?

Final Thought:

Valuation and investment amount are the first numbers on the term sheet, but they ripple through everything that follows; dilution, control, future rounds, even founder motivation. Get them wrong, and you’ll feel the pain for years.

The art is not just negotiating the highest number, but making sure the calculation behind it is fair, transparent, and sustainable. Because at the end of the day, a balanced deal gives you not just money, but the right partners to help grow it. 

Wrestling with valuation, dilution, or how to set yourself up for the next round? We give practical insights on both the business and legal side, drop us a message and let’s chat.