Question 1

What is the difference between pre-money and post-money valuation?

Accepted Answer

**Pre-money** is what the company is agreed to be worth **before** the investment; **post-money** is pre-money **plus** the money invested. The difference determines what percentage the investor gets, and confusing them is an expensive mistake made surprisingly often.

**The arithmetic.** A company agrees a **£4m pre-money** valuation and raises **£1m**:

**Post-money = £5m.**

**The investor owns £1m ÷ £5m = 20%.**

Now suppose the same £1m is raised at a **£4m post-money** valuation:

**Pre-money = £3m.**

**The investor owns £1m ÷ £4m = 25%.**

Same headline number, five percentage points of the company different. **Always establish which basis is being quoted** before agreeing anything — "we're raising £1m at £4m" is ambiguous and the ambiguity is not always accidental.

**The formula.** Investor percentage = investment ÷ post-money valuation. Always. Post-money is the denominator, which is why it is the more directly useful figure.

**Where the option pool comes in, and why it matters more than the valuation.** Investors typically require an option pool for future employees, sized as a percentage of the post-money company. The critical question is **whether it is created before or after the investment**:

**Pre-money pool** — created out of the **existing** shareholders' equity, so founders bear all of it. This is the standard investor request and is sometimes called the **option pool shuffle**.

**Post-money pool** — dilutes everyone including the new investor.

A large pre-money pool **effectively reduces the valuation** without changing the headline number. A £4m pre-money with a 15% pre-money pool is materially worse for founders than £4m with a post-money pool, and the negotiation frequently focuses on the valuation while this does more damage.

**Other things to check:** whether convertibles are counted in the pre-money, which affects everyone's percentage; and whether the valuation is on a **fully diluted** basis, which it normally is.

**Valuation is not the only term that matters.** Liquidation preferences and control provisions can matter more than the number.

General information, not legal or financial advice.

Question 2

What actually matters in a term sheet?

Accepted Answer

Far less than the valuation, and far more than founders expect. A term sheet is mostly non-binding, but it sets the terms everything else follows from, and the economic and control clauses matter

Question 3

What is a liquidation preference?

Accepted Answer

The right of certain shareholders — almost always investors — to be paid first when a company is sold or wound up, before ordinary shareholders receive anything. It is frequently the single most

Question 4

What are burn rate and runway?

Accepted Answer

Burn rate is how fast a business consumes cash; runway is how long it can continue before running out. Together they are the most important numbers in any business that is not yet profitable. Gross

Question 5

Should you bootstrap or raise investment?

Accepted Answer

It depends far less on ambition than people assume and far more on whether the business has a structural reason to need capital before revenue — and on what you actually want the business to be. What

Question 6

What is equity dilution?

Accepted Answer

Your percentage of a company falling because new shares were issued — not because anyone took shares from you. Understanding that distinction is the whole subject. How it happens. A company issues

Question 7

What is crowdfunding, and what are the different types?

Accepted Answer

Raising money from a large number of people, usually online — and it covers four fundamentally different arrangements that share a name and almost nothing else. Choosing the wrong one is the most

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