What is a priced round? How valuation and dilution work

What it is

A priced round is a funding round in which investors and founders agree on the startup's valuation and share price upfront, according to Qubit Capital. Founders Law describes it as an equity financing in which a startup issues preferred stock at an agreed valuation, such as in a Series round. Preferred stock is a class of shares that carries extra rights compared with the common stock founders usually hold.

Qubit Capital says priced rounds usually come with a full term sheet. That is the document laying out the deal terms. It also defines rights like liquidation preference (who gets paid first if the company is sold), board seats and anti-dilution protection.

How the math works

Startups.com defines pre-money valuation as the agreed value of a company immediately before a new round closes. Post-money valuation is the pre-money figure plus the new investment.

Warp's founder guide gives the key formula: investor ownership equals their investment divided by the post-money valuation.

Simply Business Valuation offers an example. An investor who puts in $2 million at an $8 million pre-money valuation creates a $10 million post-money valuation and owns 20%.

Why dilution happens

Projects House explains that dilution is not about shares changing hands. Your shares are untouched. The total number of shares grows, so your slice of the whole gets smaller.

A hypothetical example

This is an illustration with round numbers, not a real company. Say a startup has 1,000,000 shares and an $8 million pre-money valuation, which works out to $8 a share. An investor puts in $2 million and receives 250,000 new shares. There are now 1,250,000 shares, and the investor owns 20%.

A founder holding 600,000 shares owned 60% before the round. Afterward, the same 600,000 shares are 48% of the company. The founder's stake is worth $4.8 million both before ($8 a share) and after (48% of $10 million). The percentage falls; the value holds if the valuation is real.

The option-pool catch

Investors may ask a startup to enlarge its option pool before closing, Simply Business Valuation says. That pool is equity reserved for future hires. Projects House says investors typically require a pool of 10 to 15 percent.

Startups.com warns that this can turn a good headline valuation into a worse round. Its example term sheet reads: $5 million at $20 million pre-money, a 15% post-money option pool, with the current pool at 5%. Read the pool terms, not just the valuation.

How it differs from a SAFE

Qubit Capital says SAFEs and convertible notes differ because the exact price per share is decided later, in a future round. A priced round sets it now. A SAFE is a simple agreement that lets an investor's money convert into shares at that later round.

What to watch out for

A higher valuation is not automatically better. A priced round also sets terms like liquidation preference and anti-dilution, not just the price. This article is not legal, tax or investment advice.