Pre-money Valuation
Pre-money valuation is the value of a company immediately before a round of investment. In simple terms, it’s what the company is worth before new money comes in. This valuation determines how much ownership investors receive for their investment and typically includes any option pool expansion required for the financing. The relationship between pre-money valuation and investment amount determines the post-money valuation and resulting ownership percentages. For example, a $2M investment at an $8M pre-money valuation results in a $10M post-money valuation and 20% ownership for the new investors.
Post-money Valuation
Post-money valuation is the company’s value immediately after a round of investment, calculated as the pre-money valuation plus the new investment amount. Think of it as the company’s value after the new money is in the bank. This metric is crucial for understanding ownership percentages and is often used as a reference point for employee option grants and subsequent fundraising discussions. Post-money valuations are typically discussed in the context of priced rounds, while convertible instruments may use valuation caps to set maximum effective valuations.
Burn Rate
Burn rate describes the pace at which a company spends its cash reserves, typically measured on a monthly basis. In basic terms, a startup’s burn rate is the monthly operating loss (how much money is spent / lost each month). Burn rate is genrally analyzed in terms of both gross burn (total monthly spending) and net burn (monthly spending minus revenue). Every startup founder should know their burn rate, as it’s a crucial metric for calculating runway and often influences fundraising timelines and round sizes. Startups aim to maintain enough runway to achieve significant milestones plus a cushion for fundraising, with 18-24 months being a common range (so target investment ask could be calculated as 18 × [burn rate]).
Runway
Runway is the amount of time a company can operate before running out of cash, calculated by dividing current cash reserves by monthly burn rate. Simply put, it’s how many months the company can survive at current spending (and earning) levels. Calculating startup runway is a critical metric for founders to plan fundraising and cash management. Startups often adjust their burn rate to extend runway when fundraising conditions are challenging or when additional time is needed to reach key milestones.
Annual Recurring Revenue (ARR)
Annual Recurring Revenue can be formally defined as the value of contracted recurring revenue normalized to a one-year period. For subscription-based products, ARR can be easily calculated by multiplying MRR by 12 or adding up the annual value of all subscriptions. ARR is particularly important for SaaS companies and often drives valuation multiples. Investors often also scrutinize ARR growth rate and net revenue retention when considering a startup.
Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue is the normalized monthly value of recurring revenue from subscription contracts. Think of it as the predictable monthly income from all current customers. MRR calculations typically include adjustments for annual contracts (divided by 12), varying subscription tiers, and promotional pricing. The metric is often broken down into components like new MRR, expansion MRR, contraction MRR, and churned MRR to provide deeper insights into business health.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
EBITDA is a measure of a company’s operating performance that eliminates the effects of financing and accounting decisions. In simple terms, it shows earnings from pure operations before financial and tax impacts. While less commonly used for early-stage startups, EBITDA becomes increasingly important as companies mature and approach profitability. The metric is often used in conjunction with revenue multiples for valuation purposes, particularly in more established businesses or specific industries.
Dilution
Dilution is the reduction in ownership percentage of existing shareholders when new shares are issued. In practice, it’s how much smaller each owner’s slice of the pie becomes after new investment. Dilution occurs through new fundraising rounds, option pool increases, and conversions of outstanding securities. Anti-dilution provisions and pro-rata rights can help investors protect against or minimize dilution impacts. Understanding dilution impacts is crucial for founders and investors in planning financing strategies.
Liquidation Preference
Liquidation preference is a right that determines how proceeds are distributed in a liquidity event, giving certain investors priority in receiving returns. In basic terms, it’s insurance for investors to get their money back (or more) before others get paid. Common structures include 1x non-participating (investors choose between getting their money back or converting to common) and participating preferences (investors get their money back plus share in remaining proceeds). These preferences become particularly important in exit scenarios where the value is less than the total invested capital.
Exit Multiple
Exit multiple is the ratio between a company’s exit valuation and a key metric like revenue or EBITDA, or the return multiple on invested capital. In simple terms, it’s how many times larger the exit value is compared to a reference point. Common frameworks include revenue multiples (particularly for high-growth companies) and EBITDA multiples (for more mature businesses). Historical exit multiples in similar companies and sectors often inform both company valuations and investor return expectations.
Revenue Multiples
Revenue multiples are valuation metrics that express a company’s enterprise value as a multiple of its revenue, typically using ARR for subscription businesses. In practice, it’s how many times annual revenue a company is worth. These multiples vary significantly based on growth rate, gross margins, market size, and competitive position. Public company comparable multiples, adjusted for size and growth differences, often serve as reference points for private company valuations.