Your valuation is driven by your exit value and money multiple.

What happens if you plan to raise both a Series Seed and a Series A?

Then you can use the following logic to calculate the money multiple for your Series Seed:

What internal rate of return (IRR) does the Series-Seed investor want to make on his portfolio? Assume a 10.0% internal rate of return.

When will the Series-Seed investor sell his shares? Assume that he exits after 5 years.

A 10.0% internal rate of return on his portfolio and 5 years till exit means the Series-Seed investor has to make a 1.6x money multiple (MM) on his portfolio.

What is the probability of success for your startup at Series Seed? Assume a 10% probability.

A 1.6x money multiple and a 10.0% probability results in a 16.1x money multiple.

How many shares will you sell to the Series-A investor? Assume 34.1%.

A 16.1x money multiple and 34.1% of the shares for the Series-A investor means that the Series-Seed investor has to make a 24.4x money multiple on your startup to achieve his target internal rate of return.** **

**Why do I sell 34.1% of my shares to the Series-A investor?**

You can use the following logic to calculate the share percentage for the Series-A investor:

What internal rate of return does the Series-A investor want to make on his portfolio? Assume a 10.0% internal rate of return.

When will the series-A investor sell his shares? Assume that he exits after 4 years.

A 10.0% internal rate of return on his portfolio and 4 years till exit means the Series-A investor has to make a 1.5x money multiple on his portfolio.

What is the probability of success for your startup at Series A? Assume a 20% probability.

A 1.5x money multiple and a 20.0% probability results in a 7.3x money multiple for your startup at Series A.

What is your exit value? Assume $32.3m.

A $32.3m exit value and a 7.3x money multiple result in a $4.4m valuation at Series A.

How much money will you raise for your Series A? Assume $1.5m. This number comes from your 5-year cash-flow planning.

A $1.5m investment at a $4.4m valuation means you will issue the Series-A investor 34,1% new shares.

**So what?**

You issue 179 new shares for the $200k Series-Seed investment. The Series-Seed investor owns 179 / 1,179 = 15.2% of the shares.

You issue 610 new shares for the $1.5m Series-A investment. The Series-A investor owns 610 / 1,789 = 34.1% of the shares. Because the number of shares increased, the Series-Seed investor now owns 179 / 1,789 = 10.0% of the shares.

That means that he will get 10.0% instead of 15.2% of the exit value. With this 10.0% of the exit value he will achieve his target internal rate of return. Check: $200k investment, with a 10.0% probability * 10.0% shares * $32.2m exit value = $322k expected exit in 5 years, which equals a 10.0% internal rate of return.

Flip this logic upside down: to end up with 10.0% of the shares, the Series-Seed investor has to start out with 10.0% / (1 – 34,1%) = 15.2% of the shares.

This is the same as correcting his 16.1x money multiple at seed stage with the Series-A dilution. Check: 16.1x / (1 – 34,1%) = 24.4x.

Thanks to Hans Westerhof and Chretien Herben.

*Joachim Blazer is founder at Venture Value. Contact him at **joachim@venturevalue.com**.*

*Venture Value does startup valuations for founders who want to raise money with an investor.*