Pre-money vs. post-money valuation and dilution
Three terms decide what a round costs you in ownership. The option pool is the one nobody negotiates, and "5%" means two different numbers depending on what it is 5% of.
Ask a founder what they gave up in their last round and you will usually get the investor's number: "we sold 23%." That figure is normally correct and almost always incomplete.
Three terms decide what a round costs you. Two of them get negotiated hard. The third gets waved through as a formality, and it is frequently the most expensive line on the page.
Post-money is the denominator
The arithmetic is simple once you know which number sits on the bottom.
Investor ownership = raise ÷ (pre-money valuation + raise)
Raise $3,000,000 on a $10,000,000 pre-money and the investor owns 3 ÷ 13, or 23.1%. Not 30%, which is what you get if you divide by the pre-money instead, and that mistake, in that direction, is why some founders are pleasantly surprised and others feel misled.
The word to listen for is which valuation is being quoted. "A $13 million valuation" and "a $13 million pre-money" describe two different deals, and the gap between them is more than four points of your company.
The option pool shuffle
This is the term that does the quiet damage.
Investors will normally require an option pool sized to cover the hiring plan through the next round. The question that matters is not how big it is. It is whether it is carved out before or after the money goes in, and, just as important, what the percentage is a percentage of.
Standard practice is to create it pre-money. That means it comes out of the existing cap table, and the new investor's percentage is calculated after it exists. In plain terms: you are funding the pool that will hire the people who work for the company the investor just bought into, and the investor's stake is untouched by it.
This is the market convention, and every investor will expect it. But it is a negotiable number that behaves exactly like a reduction in your valuation, and it is almost never argued about with the same energy as the headline figure. A 10% pre-money pool on a $10 million pre-money is, in effect, a $1 million cut to your valuation under another name.
If you are going to push on one thing after the valuation, push on pool size, and bring a hiring plan that justifies a smaller number.
Five percent of what?
"A 5% pool" has two common meanings, and they are not the same deal.
- 5% of the pre-money company. The new pool is 5% of the cap table after it is created: everyone already on the cap table is scaled down by 5% to make room, which is what the calculator does. Be precise here, because "issue shares equal to 5% of the existing table" is a different instruction: add five to a hundred and the pool is 4.76%, not 5%. Then the round goes in and dilutes everyone, the new pool included, so it lands at 3.8% of the post-money company.
- 5% of the post-money company. The more common term-sheet formulation, usually written as a requirement that the fully diluted capitalization at closing include an unallocated pool of 5%. To reach that from a pre-money carve-out you have to issue 6.5% of the pre-money company, because the carve-out is itself diluted by the round.
On the example below, that distinction is worth 0.9 points of founder ownership (about $113,000 at the round's own post-money valuation), and it turns on a word nobody says out loud. Ask which one is meant, and get the answer in the same email as the pre-money-or-post-money question.
Putting it together
Take an illustrative company with founders at 75%, existing investors at 13%, and an option pool of 12%. It raises $3,000,000 on a $10,000,000 pre-money, with a new pool equal to 5% of the pre-money company created at close.
The pool goes in first. Everyone already on the cap table is scaled down by 5% so the new pool is 5% of the post-pool table, and founders drop from 75% to 71.3%. Then the new investor takes 23.1% of the post-money company, and everyone else is scaled down again.
Founders land at 54.8%.
Now the useful comparison. Without the new pool, the same round on the same terms would have left founders at 57.7%. So the pool cost them 2.9 points of the company, more than a tenth of what the round cost them in total, from the one term that arrived as boilerplate.
And that is the cheaper reading. Had the term sheet meant 5% of the post-money company, the carve-out would have been 6.5% of the pre-money, founders would land at 53.9%, and the pool would have cost 3.8 points rather than 2.9. The same sentence in the term sheet, a third more expensive.
That is the whole argument for modeling a round rather than reading it. The mechanics are not complicated, but they compound in an order that is easy to get wrong in your head.
Is the number market-rate?
Dilution only tells you what you paid. Whether you paid too much is a separate question, and the fastest sanity check is the multiple your pre-money implies against current revenue.
On $1,200,000 of annual recurring revenue, a $10,000,000 pre-money is about 8.3x.
For context on where that sits: Aventis Advisors put the median EV/Revenue multiple for public SaaS companies at 4.6x as of August 2026, across 54 companies above $1 billion of market capitalization, and the median for disclosed private software M&A deals from 2015 through 2026 at 4.5x, with an interquartile range of 2.4x to 8.1x across 543 transactions.
Read those as a floor check rather than a target. Primary venture rounds routinely price above M&A and public comparables, because an investor is buying growth rather than acquiring cash flows, and an early round is priced off the next one rather than off today's revenue. What the comparison does tell you is that 8.3x sits at the top of that private transaction range. That does not make it wrong. It makes it a number with 50%+ growth and clean unit economics implied behind it, because you will have to grow into it before the next round, and a flat or down round two years out costs far more than a lower valuation now.
At the other end, a multiple near or below that 2.4x lower quartile is worth interrogating. Sometimes the answer is the market. Often it is that the books could not support a stronger case, which is a fixable problem you have run out of time to fix.
One caveat on all of it: multiples move, and they moved hard in 2026. The same public SaaS index bottomed at 3.2x in June before recovering to 4.6x by August. Check the current figure rather than this one.
What the raise buys, in months
Founders raise dollars and spend months. Convert the round before you sign it.
In the illustrative example, $200,000 of existing cash plus $3,000,000 at an $85,000 monthly net burn is 37 months on today's spending. But nobody raises $3 million to keep spending $85,000 a month. The plan is to spend faster, and the real runway is whatever the post-raise burn gives you.
Two rules to hold to:
- Raise for a milestone, not a duration. "Eighteen months of runway" is not a plan. "Enough to reach $4 million of ARR with the second sales pod hired" is, and it tells you when you are off track.
- Assume the next round takes six months longer than you think. Money that funds the milestone exactly funds nothing, because you will be raising again from a position of need. Build the monthly forecast against the post-raise burn and find the month the process has to start.
Before you sign
- Confirm which valuation is quoted (pre-money or post-money) in writing.
- Confirm whether the pool percentage is of the pre-money or the post-money company, then model it at the proposed size and at half of it. The difference is what the conversation is worth.
- Check what else dilutes. Outstanding SAFEs and convertible notes convert at this round, usually at a discount or a cap, and they come out of your side of the table.
- Read the liquidation preference. A 1x non-participating preference on a clean round is standard; anything above it changes what your remaining percentage is worth at exit.
- Work out the post-raise burn and the month you have to be raising again.
Model it first
The raise and dilution modeler takes your current ownership, the raise, the pre-money and the proposed pool, and returns the post-round cap table alongside the implied revenue multiple. It carves the pool pre-money, which is what will happen in practice, and it takes about three minutes.
Run it twice: once at the terms you have been offered, once at the terms you would ask for. The gap between those two versions is your negotiating position, stated in the only unit that matters afterward.
