Valuation trinity

Hello innovators!

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In the world of startups and investments, valuation isn’t just a number, it’s a strategic tool. Today, we’re decoding the valuation trinity (copyright pending) - the three most common approaches to valuation found in investment documents. Let’s dive in!

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What’s valuation trinity?

Valuation trinity unites the three most common approaches to setting valuation in current or future funding round.

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Fixed valuation: This approach pins down the exact company value at a given time. Fixed valuation can be found both in convertible loans and equity rounds.

Valuation discount: Valuation discount lets an investor get company shares with discount in following rounds. Discounts typically range from 10-30 %. You’ll see this trinity member in convertible loans rounds.

Valuation cap: Valuation cap limits the price at which an investor’s note can convert into equity in a qualified round. This protects the investor against a huge increase in company valuation in future rounds. Again, you’ll find valuation caps in convertible loan investments.

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Let’s illustrate on an example, shall we?

Our test company has a valuation of $10M in Round 1 and raises $1M. Then, there are two scenarios for Round 2, one successful and one down round. Let’s assume the founder owns 100 % of the company before Round 1 and all numbers are in post-money valuation (understand what’s post-money here).

Let’s see how much equity our founder owns in each scenario based on the valuation approach they chose.

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Why does this matter?

Put simply, the valuation trinity defines how much equity your investors will get in a qualified round. As a founder, you need to make sure you understand the conversion mechanism so that you have control over your company’s equity.

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Dos and don'ts

Setting up your valuation can be tricky, but we've got some simple tips to help you.

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In a nutshell

The valuation trinity decides how much equity your investors will see in qualified rounds. It’s all about maintaining a balance - you need to have control over your equity, but you also need to be fair to your investors.

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If you want to chat more on this topic, reach out to our team anytime and follow us on LinkedIn for more insights.

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That’s your 5 minutes of legal know-how.

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Until next time!