What it means
When a young company raises money, investors need to know how much of the business they are buying. In a priced round, the founders and investors negotiate a pre-money valuation, which is the company's agreed value before the new money goes in.
The price per share follows from that valuation and the number of shares already in existence. The post-money valuation is the pre-money valuation plus the new investment.
An investor's ownership is simply the amount invested divided by the post-money valuation. Priced rounds are usually named by letter, such as Seed, Series A and Series B, and each new round resets the company's price per share.
Priced rounds come with heavier paperwork than convertible instruments. They set out investor rights such as board seats, liquidation preferences (who gets paid first if the company is sold) and anti-dilution protections.
Legal costs are higher and the process takes longer, but the terms are clearer for everyone. Dilution is the key consequence for founders and earlier shareholders.
When new shares are issued, existing holders own a smaller percentage, even though the company should be worth more in total. Companies often set aside an option pool at this stage, which also dilutes the earlier holders.
A nuance is that the headline valuation is not the only term that matters. A slightly lower valuation with light preferences can be better for founders than a high valuation with strict terms.
Finance teams should model outcomes under different exit values before accepting a term sheet. Timing and negotiation also matter.
Founders who raise when the business is growing quickly and has other interested investors usually obtain better terms, while those who raise under cash pressure often accept a lower valuation or tougher conditions.
In practice
Real-world examples
Example 1
A software startup raises a Series A of $6,000,000 at a pre-money valuation of $24,000,000. The investors receive 20% of the company, and the finance lead updates the capitalisation table to show each holder's new percentage. Existing holders go from owning 100% to owning 80%, but the company now has $6,000,000 of new cash to grow with.
Example 2
A medical device company has a priced round led by a specialist fund. The term sheet gives the fund a liquidation preference of one times its investment, so it is repaid first if the company is sold. The finance team models sale prices of $10,000,000, $30,000,000 and $60,000,000 to see what each group receives.
Example 3
A food delivery startup chooses a priced round over a SAFE because investors want a board seat and a clear valuation. The extra legal work costs about $40,000, but the ownership position is settled immediately. The founders also avoid the uncertainty of not knowing how many shares the convertible investors will eventually receive.
Think of it
Valuing a company in a priced round is like getting an independent property survey before buying a house. Instead of guessing what it is worth, an official price is set, and you buy a specific percentage of the bricks and mortar.
Formula
Calculation
Post-money = pre-money + investment; price per share = pre-money / fully diluted shares before the round; investor ownership = investment / post-money; dilution of existing holders = new shares / total shares after the round
Suppose a startup has a pre-money valuation of $8,000,000 and 4,000,000 fully diluted shares. The price per share is 8,000,000 / 4,000,000 = $2.00. An investor puts in $2,000,000 and receives 2,000,000 / 2.00 = 1,000,000 new shares. The post-money valuation is 8,000,000 + 2,000,000 = $10,000,000, and the investor owns 1,000,000 / 5,000,000 = 20%, which matches 2,000,000 / 10,000,000.Case study
Seen in the real world
Quillstone Labs is an illustrative, fictional analytics startup that had raised $500,000 through SAFEs. When it later raised a priced round of $3,000,000 at a pre-money valuation of $12,000,000, the SAFEs converted into shares at a discount, which gave those early investors more shares than the founders had expected.
The founders had not modelled the conversion and were surprised that their combined stake fell from 70% to 52%. The finance lead rebuilt the capitalisation table to show every step: conversion, the new option pool and the new money. The illustrative lesson is to model dilution from all sources before agreeing a valuation.
After the round closed, the finance lead sent every shareholder a plain summary of the new ownership split. The illustrative lesson was that clear communication kept the early investors supportive even though their percentages fell.
Watch out
Common mistakes
- Focusing on the headline valuation and ignoring liquidation preferences, anti-dilution terms and other conditions.
- Forgetting that a larger option pool created before the round reduces the founders' effective ownership.
- Confusing pre-money and post-money valuation, which changes the investor's ownership percentage.
Questions
People also ask
What is the difference between a priced round and a convertible note?
In a priced round shares are issued at an agreed price now, whereas a convertible note delays the price until a later round.
Does a higher valuation always benefit founders?
Not necessarily, because a high price can lead to a later down round if growth does not keep pace.
Who sets the price in a priced round?
The founders and the lead investor negotiate it, informed by growth, market conditions and comparable deals.