How VCs Price a Round: Valuation and Dilution Math in India

Founders usually negotiate a round around one number, the valuation. Investors think in three: how much they put in, what percentage that buys, and what that stake could be worth at exit. The gap between the headline valuation and what founders actually keep comes from the maths in between: the share count, the option pool and any notes converting into the round.

This note explains that maths with simple illustrative numbers, shows how investors work back from an exit, and sets out the Indian legal floors that sit under any negotiated price. The numbers are examples, not market benchmarks.

The three numbers that define a round

Post-money valuation is pre-money plus the new money. The investor's stake is the new money divided by the post-money. So Rs 5 crore at a Rs 20 crore pre-money buys 20 percent of a Rs 25 crore company. Every other number follows from these.

The price per share is the pre-money divided by the fully diluted pre-money share count. Fully diluted normally includes issued equity, preference shares on an as-converted basis, the whole ESOP pool whether granted or not, warrants, and any notes converting in the round. Ask exactly what the term sheet counts, because the same valuation can mean a very different price per share.

How investors work back from the exit

Early-stage investors often price with the venture capital method. They estimate what the company could be worth at exit, decide the multiple they need on this cheque, allow for dilution from future rounds, and solve for the stake they need today.

Illustrative only: an investor putting in Rs 5 crore believes the company could exit at Rs 500 crore and wants 10 times its money. It needs 10 percent at exit, that is Rs 50 crore of Rs 500 crore. If it expects later rounds to leave it with 60 percent of today's stake, it needs about 16.7 percent now, which implies a Rs 30 crore post-money and a Rs 25 crore pre-money.

The lesson is that valuation is mostly a return calculation on the investor's side. You move it by making the exit case more credible or the path to it less dilutive, not by pointing to what you have spent.

Where founders lose dilution they did not expect

Headline dilution is rarely the full story. These are the usual sources of the gap.

The pool effect is large enough to need its own model, and our note on ESOP pool sizing before Series A works through it. Repeated rounds also compound: if each of four rounds sells about 18 percent, a founder who started with 100 percent keeps about 45 percent before any pool, because 0.82 multiplied by itself four times is about 0.45.

• An option pool created or topped up inside the pre-money, so only existing holders bear it
• Notes that convert inside the pre-money share count, again at the founders' cost
• Several convertibles with different caps and discounts stacking into the same round
• Anti-dilution adjustments if a later round is priced lower
• Advisor shares and pool top-ups agreed informally between rounds

Worked example: a note converting into a priced round

Illustrative only. Founders hold 10,00,000 shares. An earlier Rs 1 crore note has a Rs 10 crore valuation cap and a 20 percent discount. A new investor puts in Rs 5 crore at a Rs 20 crore pre-money and insists the note converts inside the pre-money.

The cap gives a conversion price of Rs 100 per share, Rs 10 crore divided by 10,00,000 shares, so the note becomes 1,00,000 shares; the discount would give a higher price, so the cap wins. The pre-money share count becomes 11,00,000 and the round price about Rs 182. The investor gets 2,75,000 shares, exactly 20 percent. The note holder ends with about 7.3 percent and the founders with about 72.7 percent, not the 80 percent the headline suggested.

Indian rules that sit under the maths

The negotiated price must also clear legal floors. A preferential allotment under section 62(1)(c) of the Companies Act, 2013 needs a registered valuer's report. Shares issued to a foreign investor under FEMA must be priced at or above fair value worked out by a CA, a SEBI-registered merchant banker or a practising cost accountant using an internationally accepted method.

Convertibles carry two more FEMA rules: the conversion price or formula must be fixed when the instrument is issued, and the conversion price cannot be lower than fair value at the time of issue. A foreign investor also cannot be promised an assured exit return. A plain US-style SAFE is not a permitted instrument for foreign money, so Indian versions are usually structured as CCPS, or as a convertible note that meets the conditions for recognised startups.

On income tax, the angel tax charge under section 56(2)(viib) of the 1961 Act was removed with effect from assessment year 2025-26, so issues on or after 1 April 2024 are outside it, but earlier issues can still be examined, so keep old valuation reports on file.

Use the maths before you negotiate

Build a fully diluted cap table before the first term sheet arrives, and run each offer through it: the pool, the notes and the price per share, not just the headline valuation. Then compare offers on what you will own after the next round, which is the number that matters.

Decide your walk-away dilution in advance, and remember that valuation, pool size and conversion terms trade against each other. A slightly lower valuation with a smaller pre-money pool can leave founders owning more.

Frequently asked questions

What is the difference between pre-money and post-money valuation?

Pre-money is the value agreed for the company before the new money; post-money is pre-money plus the new money. The investor's stake is the investment divided by the post-money, before any pool or conversion effects.

How much dilution is normal in a seed or Series A round?

There is no fixed rule; it depends on how much you raise and at what valuation. The better test is what you will own after the next two rounds and the option pool, so model that before you agree a number.

Does a valuation report set our round price?

No. The price is negotiated. The report supports the price and sets legal floors, such as fair value for FEMA and a registered valuer's price for a preferential allotment. The negotiated price must sit on the right side of those floors.

Should we raise on a SAFE-style note or a priced round?

Notes are faster and defer the valuation debate, but they convert later at the cap or discount and can stack up. Foreign investors need a FEMA-permitted instrument such as CCPS, or a qualifying convertible note. Our comparison of SAFE, CCD and priced rounds covers the trade-offs.

Related guides

• ESOP pool sizing before Series A
• SAFE vs CCD vs priced round
• Startup valuation report in India
• Cap table design from day one