Valuation & Equity
"How much is our company worth?"
It was 11 PM. Priya and her co-founder Deepak were sitting in their tiny Haldwani office — which was really just a room above a stationery shop. Deepak had joined six months ago. He'd left his data science job in Pune to build the tech side of Priya's agri-tech platform.
They'd just finished a call with an angel investor from Delhi. The investor said: "I'll put in ₹50 lakh for 20% of the company."
Deepak put down his phone and looked at Priya. "Wait. If ₹50 lakh buys 20%, that means he thinks the whole company is worth ₹2.5 crore?"
Priya blinked. "We've made ₹2 lakh in total revenue. How can we be worth ₹2.5 crore?"
"That's... a good question."
They sat in silence for a while.
"Also," Deepak said, "if he gets 20%, what happens to our shares? I have 30%. You have 70%. After his 20%, I'll have... less than 30%?"
"I think so?"
"How much less?"
More silence.
This chapter explains equity, valuation, and ownership — the concepts that confuse almost every first-time founder. We'll use Priya's story to make it concrete, with real numbers and simple math.
What is equity?
Equity is ownership of the company, represented in shares.
Think of a company as a pizza. When Priya started alone, she owned the entire pizza — 100%. When Deepak joined as co-founder, she gave him a slice. When an investor puts in money, they get a slice too. Every time someone gets a slice, everyone else's slices get a little smaller.
That's equity in one paragraph.
More precisely:
- A company issues shares (units of ownership)
- If the company has 10,000 shares and you own 3,000, you own 30%
- Your percentage can change if new shares are issued (this is dilution — more on that later)
- Equity is not cash. You can't spend it at a shop. It only becomes cash if the company is sold, goes public, or buys back shares.
Important: Equity is a bet on the future. Priya's 70% of a company worth ₹2.5 crore looks like ₹1.75 crore on paper. But it's paper value only. If the company fails, that 70% is worth ₹0. If it becomes worth ₹250 crore, that 70% (diluted by then, maybe to 35%) is worth ₹87.5 crore.
Cap table basics
A cap table (capitalization table) is a spreadsheet that shows who owns how much of the company. It's the single most important document in a startup's corporate life.
Priya's cap table at founding:
Shareholder Shares Percentage
─────────────────────────────────────────
Priya Rawat 10,000 100%
─────────────────────────────────────────
Total 10,000 100%
Simple. She started the company and owns all of it.
Priya's cap table journey
Let's walk through how Priya's cap table evolved over time — from sole founder to having a co-founder, ESOP pool, and investors.
Step 1: Co-founder split
Deepak joins as co-founder and CTO. They agree on a 70-30 split (Priya gets more because she founded the company, found the problem, built the initial traction, and brought Deepak in).
The company issues 4,286 new shares to Deepak (so that his shares = 30% of the new total).
Shareholder Shares Percentage
─────────────────────────────────────────
Priya Rawat 10,000 70%
Deepak Bisht 4,286 30%
─────────────────────────────────────────
Total 14,286 100%
Step 2: ESOP pool
Before raising money, they create an ESOP pool (Employee Stock Option Pool) of 10%. This is equity reserved for future employees — a way to attract talent by offering them a share of the company.
The ESOP pool dilutes both founders equally. 1,587 new shares are created for the pool.
Shareholder Shares Percentage
─────────────────────────────────────────
Priya Rawat 10,000 63%
Deepak Bisht 4,286 27%
ESOP Pool 1,587 10%
─────────────────────────────────────────
Total 15,873 100%
Notice: Priya went from 70% to 63%. Deepak went from 30% to 27%. Neither lost shares — but the total pie got bigger, so their percentage got smaller. This is dilution.
Step 3: Angel round
The angel investor puts in ₹50 lakh for 20%.
Pre-money valuation = the company's value BEFORE the investment = ₹2 crore.
Post-money valuation = pre-money + investment = ₹2 crore + ₹50 lakh = ₹2.5 crore.
The investor's 20% represents ₹50 lakh of the ₹2.5 crore post-money value.
3,968 new shares are issued to the investor.
Shareholder Shares Percentage
─────────────────────────────────────────
Priya Rawat 10,000 50.4%
Deepak Bisht 4,286 21.6%
ESOP Pool 1,587 8.0%
Angel Investor 3,968 20.0%
─────────────────────────────────────────
Total 19,841 100%
Priya: 63% → 50.4%. Deepak: 27% → 21.6%. ESOP: 10% → 8%. The angel gets 20%.
Everyone got diluted by 20% of their previous stake.
Step 4: Seed round (one year later)
A VC fund puts in ₹2 crore for 15% at a ₹11.3 crore pre-money valuation.
Post-money = ₹11.3 crore + ₹2 crore = ₹13.3 crore.
Shareholder Shares Percentage
─────────────────────────────────────────
Priya Rawat 10,000 42.8%
Deepak Bisht 4,286 18.4%
ESOP Pool 1,587 6.8%
Angel Investor 3,968 17.0%
Seed VC 3,502 15.0%
─────────────────────────────────────────
Total 23,343 100%
Priya started at 100%. After co-founder, ESOP, angel, and seed round, she's at 42.8%. That sounds like a lot of dilution. But here's the thing:
- At 100% ownership, the company was worth ₹0 (just an idea)
- At 42.8% ownership, the company is valued at ₹13.3 crore
- Priya's 42.8% = ₹5.7 crore on paper
Owning a smaller percentage of a much larger pie is better than owning 100% of nothing.
Dilution explained simply
Dilution is when your ownership percentage decreases because new shares are issued.
Think of it like this: you have 1 of 4 slices of pizza (25%). Someone brings a bigger plate and adds 1 more slice for a new person. Now there are 5 slices total. You still have your 1 slice, but it's now 1/5 = 20%.
You didn't lose pizza. The pizza got bigger. Your percentage got smaller.
Dilution math formula:
Your new percentage = Your old percentage × (1 - new investor's percentage)
If Priya had 63% and the angel got 20%:
Priya's new % = 63% × (1 - 0.20) = 63% × 0.80 = 50.4%
This is why founders need to be thoughtful about how much equity they give away in each round. Each round compounds the dilution.
Typical dilution per round:
| Round | Typical Dilution | Typical Amount |
|---|---|---|
| Co-founder | 20-50% | No cash, sweat equity |
| ESOP pool | 10-15% | Reserved for employees |
| Angel/Pre-seed | 10-20% | ₹25 lakh - ₹1 crore |
| Seed | 15-25% | ₹1-5 crore |
| Series A | 20-30% | ₹5-25 crore |
After Angel + Seed + Series A, a founder who started at 100% might be at 30-40%. That's normal and fine — if the company's value has grown proportionally.
Valuation methods for startups
How did the angel investor decide Priya's company was worth ₹2 crore (pre-money) when she had only ₹2 lakh in revenue?
Honestly? For early-stage startups, valuation is mostly negotiation. There's no formula that spits out an exact number. But there are frameworks that guide the discussion.
Pre-money vs Post-money
This is the most fundamental distinction in startup valuation.
Pre-money valuation = what the company is worth BEFORE new investment.
Post-money valuation = pre-money + new investment.
Post-money = Pre-money + Investment
Investor's % = Investment / Post-money
Example: Pre-money = ₹2 crore. Investment = ₹50 lakh.
- Post-money = ₹2.5 crore
- Investor's % = ₹50L / ₹2.5 crore = 20%
Always clarify whether a number is pre-money or post-money. Mixing them up is an expensive mistake.
Revenue multiples
For companies with some revenue, you can estimate valuation as a multiple of revenue.
Valuation = Annual Revenue × Multiple
What multiple? It depends on:
- Industry (tech companies get higher multiples than food businesses)
- Growth rate (fast growth = higher multiple)
- Stage (early stage = higher uncertainty = wider range)
Typical early-stage multiples in India:
- SaaS: 10-30x ARR
- Marketplace/platform: 5-15x ARR
- E-commerce/D2C: 3-8x ARR
- Food/FMCG: 2-5x revenue
Priya's ARR is ₹5.4 lakh. At a 5-15x marketplace multiple, that gives a range of ₹27 lakh to ₹81 lakh. But her pre-money valuation was ₹2 crore. Why?
Because at the early stage, the investor isn't just valuing current revenue. They're valuing the team, the market opportunity, the traction trend, and the potential.
Comparable company analysis
Look at what similar companies were valued at in their early rounds.
If three agri-tech startups in India raised seed rounds at ₹8-15 crore valuations with similar traction, that gives Priya (and her investors) a reference point.
This is imprecise, but it anchors the conversation in reality.
For early stage: it's mostly negotiation
The honest truth about early-stage valuation:
- The founder wants a high valuation (less dilution for the same amount of money)
- The investor wants a low valuation (more ownership for the same amount of money)
- They negotiate until they find a number both can live with
- That number is influenced by: how much the investor wants the deal, how many other investors are interested, market conditions, and comparable deals
Tip for founders: Don't obsess over getting the highest possible valuation. A slightly lower valuation from a great investor who adds real value (connections, advice, follow-on funding) is better than a higher valuation from an investor who just writes a check.
What drives valuation
Four things matter most:
1. Team At the early stage, investors are betting on people more than products. Does the founding team have relevant experience? Can they execute? Do they understand the problem deeply?
Priya: engineering background, worked at an MNC, deep personal connection to the farmer problem, already built traction. Deepak: data science background, built the tech platform. Strong team.
2. Market size Bigger market = bigger potential = higher valuation. Priya's TAM of ₹6-7 lakh crore (Indian fresh produce) makes investors excited. A smaller market would mean lower valuation.
3. Traction Real users doing real things. Not promises, not projections — actual usage data. Priya's 500 active farmers, growing transactions, and improving retention were key to her valuation.
4. Growth rate Investors don't just look at where you are — they look at how fast you're getting there. 19% month-over-month growth is a strong signal that Priya's startup can scale.
ESOP: attracting talent without cash
ESOP (Employee Stock Option Plan) is how startups attract good people when they can't afford high salaries.
How it works:
- The company creates an ESOP pool (usually 10-15% of equity)
- Employees are granted stock options — the right to buy shares at a fixed price (called the strike price) in the future
- Options vest over time (more on vesting below)
- If the company does well and the share price goes up, the employee can buy shares at the old, lower price — the difference is their gain
Example: Priya offers her first developer, Rahul, stock options:
- 500 shares at a strike price of ₹10/share
- If the company eventually sells at ₹500/share, Rahul can buy 500 shares at ₹10 (₹5,000 total) and they're worth ₹2,50,000
- Net gain: ₹2,45,000
The catch: options are worthless if the company fails. There's no guarantee. That's why it's important to offer a reasonable base salary alongside stock options — not just options.
For employees considering an ESOP offer: Ask these questions:
- What percentage of the company do my options represent? (500 shares means nothing without knowing the total share count)
- What's the current valuation? (This tells you what your shares are worth today)
- What's the vesting schedule? (When do I actually earn these shares?)
- What happens if I leave?
- What's the company's plan for an exit? (This is when your shares turn into money)
Vesting schedules
Vesting means you earn your equity over time, not all at once. This protects everyone.
Standard vesting schedule: 4-year vesting with 1-year cliff.
What this means:
- 1-year cliff: You get nothing if you leave before 12 months. This protects the company from someone joining, getting equity, and leaving immediately.
- After the cliff: Your shares vest monthly over the remaining 3 years (36 months). Each month, 1/48th of your total grant becomes yours.
Example: Deepak has 4,286 shares with standard vesting.
- Month 0-11: Nothing vested. If Deepak leaves, he gets 0 shares.
- Month 12 (cliff): 1,072 shares vest (25% = 1 year's worth)
- Month 13-48: ~89 shares vest each month (remaining 3,214 shares ÷ 36 months)
- Month 48: Fully vested. All 4,286 shares are his.
Why vesting matters for co-founders:
This is the scenario every startup dreads: two co-founders split equity 50-50. Three months in, one co-founder decides this isn't for them and leaves. Without vesting, they walk away with 50% of the company while doing none of the future work.
With vesting, they'd have earned only 3 months' worth — essentially nothing (if there's a 1-year cliff, literally zero).
Rule: ALWAYS have a vesting agreement between co-founders. Even if you're best friends. Especially if you're best friends. Business changes people, and protecting the company protects the friendship.
Common equity mistakes
1. Giving away too much too early
First-time founders often give away 40-50% to early advisors, first employees, or even friends who "helped." Then when it's time to raise money, there's not enough equity left to give investors without the founder losing control.
Rule of thumb: Advisors get 0.25-1%. Early employees get 0.5-2%. Consultants who help for a few months don't get equity — they get paid.
2. Not having a vesting agreement with co-founders
We just covered this. Without vesting, a co-founder who leaves after 3 months keeps all their shares. This can cripple the company.
3. Not understanding dilution math
Some founders think: "I'll give 20% to the angel, 15% to the seed investor, and 25% to Series A. That's 60%, so I'll still have 40%."
Wrong. Dilution compounds. Let's do the math:
Starting: 100% After angel (20%): 100% × 0.80 = 80% After seed (15%): 80% × 0.85 = 68% After Series A (25%): 68% × 0.75 = 51%
You'd have 51%, not 40%. Better than expected in this case — but the math is different from simple addition. Always calculate it properly.
4. Equal splits by default
Two co-founders splitting 50-50 because "it seems fair" is one of the most common mistakes. The split should reflect:
- Who had the original idea?
- Who has been working on it longer?
- Who is contributing more (technical skills, domain expertise, network, capital)?
- Who is taking more risk (quitting a job, investing savings)?
50-50 is fine if both co-founders are truly contributing equally. But think about it carefully rather than defaulting to it.
5. Not getting legal documentation
Verbal agreements about equity are worthless. Every equity arrangement needs:
- A shareholders' agreement
- Board resolution for share issuance
- Vesting agreements
- ESOP agreements
Yes, lawyers cost money. But equity disputes without documentation cost much more.
Convertible notes and SAFE agreements
At the very early stage, founders and investors sometimes don't want to set a valuation. The company might be too early to value properly. That's where convertible instruments come in.
Convertible Note
A convertible note is a loan that converts into equity later, usually during the next funding round.
How it works:
- Investor gives you ₹25 lakh as a loan
- The loan doesn't get repaid in cash
- When you raise your next round (say, a seed round at ₹10 crore valuation), the loan converts into shares
- The investor usually gets a discount (typically 15-20%) as a reward for investing early
Example: Investor gives ₹25 lakh as a convertible note with a 20% discount. At the seed round, shares are priced at ₹100/share. The note holder gets shares at ₹80/share (20% discount). So ₹25 lakh / ₹80 = 3,125 shares, instead of the 2,500 shares they'd get at full price.
SAFE (Simple Agreement for Future Equity)
Created by Y Combinator, a SAFE is even simpler than a convertible note. It's not a loan — there's no interest, no maturity date.
How it works:
- Investor gives you money now
- In return, they get the right to receive shares in the next priced round
- Usually with a valuation cap (maximum valuation at which their money converts) and/or a discount
Example: Investor gives ₹20 lakh via SAFE with a ₹5 crore valuation cap. If the seed round values the company at ₹12 crore, the SAFE investor's money converts at the ₹5 crore cap — giving them a much better price per share than the seed investors.
When to use convertible instruments:
- Very early stage (pre-revenue or very low revenue)
- When you and the investor can't agree on a valuation
- For small amounts (₹10-50 lakh) where the full legal cost of a priced round isn't justified
- When you want to move fast (SAFEs can be done in days, priced rounds take weeks)
Word of caution: Stacking too many convertible notes or SAFEs with different terms can create a messy cap table when they all convert. Keep track of every instrument, model the conversion math, and understand your dilution before signing.
Key takeaways
- Equity is ownership of the company, represented in shares. It's paper value until there's an exit.
- A cap table tracks who owns what. Keep it clean and updated.
- Dilution happens every time new shares are issued. Owning less of a bigger company is usually better than owning more of a smaller one.
- Pre-money = value before investment. Post-money = pre-money + investment. Always clarify which one you're talking about.
- Early-stage valuation is mostly negotiation, guided by team strength, market size, traction, and growth rate.
- ESOPs let you attract talent without cash. But always offer a reasonable base salary too.
- Use 4-year vesting with 1-year cliff for co-founders and employees. No exceptions.
- Common mistakes: giving away too much early, no co-founder vesting, not understanding dilution math.
- Convertible notes and SAFEs are useful for early-stage deals when you can't agree on valuation.
- Get legal documentation for every equity arrangement. Verbal agreements don't protect anyone.
Priya's cap table is clean, her angel investment is in the bank, and she understands exactly what she owns and what she's given up. Next challenge: raising a proper seed round. How does fundraising actually work? Who are the right investors? And how do you avoid the traps? Next chapter: Fundraising.