Every startup needs money. Money to pay staff. Money to pay for marketing. And money to pay for expensive lawyers! But how will your company’s funding needs evolve over time? Determining the size of your raise can seem complicated at first, but once you get a handle on how the math works, it’ll be as easy as 1-2-3!

## Burn Rate and Road Maps

You may have a burn rate of $20,000 per month today. What does that burn rate look like after you achieve some important milestones? Does it jump to $30,000 per month? $50,000? More? What revenues will you have coming in (if any) to offset any of that burn?

The first step in determining the size of your raise is making sure you’ve developed a budget with lines up with your product development road map. If you can’t show your investors that you’ve budgeted adequately for what you want to achieve, you can’t expect them to have any confidence in the numbers you show them.

Now take a look at your budget and determine how much you need for the next 18-24 months to get a range. The range is important, because (a) you may not get the maximum amount you want, and (b) you’ll want to run the numbers across a few different scenarios.

## Pre-Money Valuation and Calculating Dilution

Your company’s pre-money valuation will be the biggest factor in helping you determine the size of your raise. For now, we’ll assume you’ve done your homework and come up with a reasonable pre-money valuation. If you’re looking for a great primer on how to do that, take a look at Stéphane Nasser’s article on Medium. Remember, although pre-money valuations are more art than science, you still need to be able to back-up your numbers.

### Example 1: Pre-Money Valuation @ $5M

First, let’s set out our variables:

- Pre-Money Valuation: $5,000,000
- Common Shares Outstanding: 1,000,000 shares
- Option Pool: 111,111 options
- Size of raise: $1,000,000

That means that the company’s capitalization is 1,111,111 shares on a fully diluted basis (i.e., assuming the exercise of all options). So the option pool represents 10% of the overall capitalization (i.e., 111,111 / 1,111,111), and the common shares represent 90% of the overall capitalization.

If we distribute the pre-money valuation across the pre-money capitalization, we get the following:

Holders | Pre-Money Capitalization | Pre-Money Valuation | Dilution |

Founders | 1,000,000 common shares | $4,500,000 | 90% |

Employees & Advisors | 111,111 options | $500,000 | 10% |

Total | 1,111,111 (shares & options) | $5,000,000 | 100% |

If we have a pre-money valuation of $5,000,000 and we are raising $1,000,000, we have a post-money valuation of $6,000,000 (i.e, pre-money valuation + size of raise). Now it’s time to do some cross-multiplying to determine what post-money capitalization we should have in total for a post-money valuation of $6,000,000.

1,111,111 pre-money capitalization | = | $5,000,000 pre-money valuation |

X post-money capitalization | = | $6,000,000 post-money valuation |

To solve for X, we need to multiply 1,111,111 by $6,000,000 and then divide by $5,000,000. The result is that X is 1,333,333.

Now, if we subtract the pre-money capitalization from the post-money capitalization, we get 222,222 (i.e., 1,333,333 less 1,111,111). So now we know that for $1,000,000, the company will need to issue 222,222 shares to the investors. That also means the price per share is $4.50 per share. 222,222 shares over a total of 1,333,333 means that the 222,222 shares represent 16.67% of the post-money capitalization. Here’s how it all shakes out:

Holders | Post-Money Capitalization | Post-Money Valuation | Dilution |

Founders | 1,000,000 common shares | $4,500,000 | 75% |

Employees & Advisors | 111,111 options | $500,000 | 8.33% |

Investors | 222,222 investor shares | $1,000,000 | 16.67% |

Total | 1,333,333 (shares & options) | $6,000,000 | 100% |

To think of it another way, a $1,000,000 investment over a $6,000,000 post-money valuation represents 16.67% of the overall valuation.

### Example 2: Pre-Money Valuation @ $8M

Let’s try this again, with all information staying the same except the pre-money valuation. Instead of $5,000,000, let’s use $8,000,000.

- Pre-Money Valuation: $8,000,000
- Common Shares Outstanding: 1,000,000 shares
- Option Pool: 111,111 options
- Size of raise: $1,000,000

If we apply the same logic as above, we start with a pre-money cap table that looks like this:

Holders | Pre-Money Capitalization | Pre-Money Valuation | Dilution |

Founders | 1,000,000 common shares | $7,200,000 | 90% |

Employees & Advisors | 111,111 options | $800,000 | 10% |

Total | 1,111,111 (shares & options) | $8,000,000 | 100% |

Now let’s see what it looks like when investors buy $1,000,000 of shares:

Holders | Post-Money Capitalization | Post-Money Valuation | Dilution |

Founders | 1,000,000 common shares | $7,200,000 | 80% |

Employees & Advisors | 111,111 options | $800,000 | 8.88% |

Investors | 222,222 investor shares | $1,000,000 | 11.11% |

Total | 1,333,333 (shares & options) | $9,000,000 | 100% |

If we compare the two results, we see that in Example 2, the fact that we have a greater *pre-money *valuation means founders will suffer less dilution when the round closes (80% overall in Example 2, compared to 75% overall in Example 1).

## So what’s the size of your raise?

To bring it all together, if you know that your road map over the next 18-24 months means that you’ll likely need somewhere between $1,000,000 and $1,500,000, you need to think about how much dilution that represents.

If your company is only worth $1,000,000 pre-money, and you add $1,000,000 of investment, you’re going to have too much dilution in the round to make it worthwhile. If your pre-money valuation is $10,000,000, then the $1,000,000 investment will only represent 9.09% dilution.

So before you determine the size of your raise, don’t forget to determine (as best you can) how much your company is worth. Then think about how much money you need to raise to get you through to the next major milestone and financing round.

And if you can’t agree on a pre-money valuation with your investors, then maybe it’s time to start thinking of a convertible debt instrument like a convertible note.