Valuation, dilution & the cap table — three core formulas
🎯 Goal: Understand how one funding round changes ownership; build a simple cap table and compute price per share, new shares issued, and the founders' dilution.
Three core formulas let you read any round: (1) post-money = pre-money + investment; (2) investor % = investment ÷ post-money; (3) when the company issues new shares to the investor, existing holders get "diluted" — their % drops even though the NUMBER of shares they hold does not change. You'll also learn to compute the price per share and how many new shares to issue so the investor holds the agreed %. This is the foundational arithmetic so you never "mis-sign" a cap table.
Lesson content
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Three formulas, one line of thought. Start from pre-money (the company's value before money enters). Add the raise to get post-money. The investor pays to own a slice of that post-money: • post-money = pre-money + investment • investor % = investment ÷ post-money • existing holders (combined) % = pre-money ÷ post-money The key point: existing holders lose no shares; the "pie" grows, so their slice becomes a smaller share of a bigger pie.
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A 5-step framework to build a round in numbers. Example: founders hold 1,000,000 shares = 100%, raise 2bn at a pre-money of 8bn. ① post-money = 8 + 2 = 10bn. ② investor % = 2 ÷ 10 = 20%. ③ price per share = pre-money ÷ old shares = 8bn ÷ 1,000,000 = 8,000₫/share. ④ new shares = investment ÷ price per share = 2bn ÷ 8,000 = 250,000 shares (check: 250,000 ÷ 1,250,000 = 20% ✓). ⑤ founders' new % = 1,000,000 ÷ 1,250,000 = 80%. From 100% to 80% = dilution, even though your share count is still 1,000,000.
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TOOL: The cap table, before/after the round. Same example, raising 2bn at 8bn pre-money:
Shareholder
Shares
% BEFORE
% AFTER
Founders
1,000,000
100%
80%
Investor
250,000
—
20%
TOTAL
1,250,000
100%
100%
Reading a cap table: the "shares" column is the hard truth; the "%" column is just shares ÷ total. Every time the total grows (new issuance), all old %s automatically shrink — that is the whole nature of dilution.
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Vietnam comparison (step by step). 1) The common vehicle to take investment is a joint-stock company (often converted from an LLC when raising). 2) There are common shares (voting, ordinary dividends) and preferred shares (voting/dividend/redemption preferences...). 3) The ESOP pool (staff shares) is set up under the Enterprise Law and the charter. 4) A real cap table needs a lawyer & accountant to reconcile it with the charter, share register, and license. Coolmate, across Series A→B→C, runs on exactly such a multi-round cap table — real figures are always built by professionals.
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Valuation & dilution traps: • Confusing "losing shares" with "dilution": no shares are taken; your % shrinks because the total grows. • Selling too much % early: a young valuation → the same money sells more %, draining equity for later. • Forgetting the ESOP: creating an ESOP also issues new shares → also dilutes (usually founders bear it). • Watching only %, ignoring share count & share class: preferred shares can carry outsized rights despite a small %. Content is for LEARNING only, not financial/legal advice.
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Checklist to read/verify a round: ① Is it clearly stated as pre-money or post-money? (Mixing them shifts the % instantly.) ② post-money = pre + investment — does it match? ③ investor % = investment ÷ post-money — does it equal their stated number? ④ Do the price per share and new shares issued produce that exact %? ⑤ After the round, do all %s add to 100%? ⑥ Is there an ESOP to carve out first, and who bears its dilution?
Practice exercise
🔬 APPLIED EXERCISE (fill the cap table): A startup raises 1bn at a 4bn pre-money. Founders hold 800,000 shares. Compute in 5 steps: (1) post-money, (2) investor %, (3) price per share, (4) new shares to issue, (5) founders' remaining %. Draw the before/after cap table.
Worked template: FILLED ANSWER: (1) post = 4 + 1 = 5bn. (2) investor % = 1 ÷ 5 = 20%. (3) price/share = 4bn ÷ 800,000 = 5,000₫. (4) new shares = 1bn ÷ 5,000 = 200,000 → total 1,000,000. (5) founders = 800,000 ÷ 1,000,000 = 80%. AFTER cap table: Founders 800,000 (80%) · Investor 200,000 (20%) · Total 1,000,000 (100%).
Quick quiz
1. How is post-money computed?
→ Pre-money + the investment amount
Post-money = pre-money + the investment amount.
2. The investor's ownership in a round equals:
→ Investment ÷ post-money
Investor % = investment ÷ post-money.
3. What does "dilution" mean?
→ Existing holders' % drops when new shares are issued, though their share count is unchanged
Dilution is the drop in existing holders' % when new shares are issued, though their share count is unchanged.
4. Founders hold 1,000,000 shares, raising 2bn at 8bn pre-money. What is the price per share?
→ 8bn ÷ 1,000,000 = 8,000₫
Price per share = pre-money ÷ old shares = 8bn ÷ 1,000,000 = 8,000₫.
5. Same example — how many new shares to issue so the investor holds 20%?
→ 250,000 shares
New shares = investment ÷ price per share = 2bn ÷ 8,000 = 250,000 (= 20%).
6. Why are existing holders diluted even without selling shares?
→ Because total shares rise (new issuance), so % = old shares ÷ a larger total → smaller
Existing holders dilute because the total rises, so % = old shares ÷ a larger total → smaller.
Advanced
A deeper framework
At an advanced level, clearly distinguish pre-money from post-money when agreeing on "20%". If 20% is of post-money, the investor gets 20% after money enters. If it's of pre-money (rare and worse for you), they get more shares. One ambiguous phrase can shift a few points of ownership — worth a lot later.
A common hidden trap is the "pre-money ESOP": the investor asks to create/expand the ESOP before the round and count it in pre-money. Then the ESOP's dilution is borne by founders alone, while the new investor isn't diluted by the ESOP. Always ask: "is the ESOP counted pre- or post-round, and who bears its dilution?"
A pre-round ESOP pushes dilution onto founders
Before: founders 100% (1,000,000 shares)
—
Create a 10% ESOP BEFORE the round (issue 111,111 shares)
founders now 90%
Then sell 20% to the new investor
founders 90% × 0.8 = 72%
Versus ESOP counted AFTER the round
founders ~72% vs ~80% — ~8-point gap
Same "10% ESOP + sell 20%", but a pre-round ESOP makes founders bear its full dilution → ~8 points lower than if counted after the round.
Common trap: Agreeing on a "%" without stating pre- vs post-money, and without stating whether the ESOP is counted before or after the round. These two ambiguities can quietly move several points of ownership from founders to investors — always spell it out in the term sheet and have a lawyer read it.
Advanced questions
1. You agree "the investor gets 20%". Which reading is worse for founders?
→ 20% of pre-money → they get more shares, diluting founders more heavily
20% of pre-money means the shares granted are larger than 20% of post-money, growing the total more and diluting founders harder. Always specify "post-money" if you want the favorable side.
2. A "pre-money ESOP pool" (created before the round) affects whom most?
→ Founders — the ESOP's dilution falls on them, while the new investor isn't diluted by the ESOP
When the ESOP is counted in pre-money, it is "created first" so it dilutes only existing holders (mainly founders); the new investor enters after the ESOP and isn't diluted by it.
3. Why is raising too much too early bad for founders?
→ Because valuation is low, so selling lots of % for cash → heavy dilution, no equity for later, and risk of losing control
A young company → low pre-money → the same money sells more %. Heavy early dilution leaves very little equity for later rounds and risks founders losing control.
🎯 Real-life mission
REAL-LIFE MISSION: Build a cap table on paper/Excel. Start with founders at 1,000,000 shares = 100%. Choose any round (set your own pre-money and investment), then compute all 5 steps: post-money, investor %, price per share, new shares, founders' remaining %. Show each formula and draw the before/after table.