To work out how to value a startup with little or no revenue, set a pre-money value from potential and comparable deals. Add the new cash to get the post-money value, then divide the investment by that figure to find the stake sold.
Valuation is one step in the wider journey covered in how to start a startup. This guide covers the arithmetic and methods only, not negotiation tactics or splitting equity between founders.
Why early-stage valuation rests on potential
Startup valuations are calculated largely on potential rather than current financials, according to SoFi’s valuation guide. A company with no revenue has no earnings history to value, so every method here substitutes judgement about the future, a benchmark from other companies, or a cost estimate.
Financial Pipeline’s startup valuation explainer suggests thinking of a startup as a bag of real options. Revenue alone does not settle the value, because the same $1M in annual recurring revenue made Facebook much more valuable than Pets.com at that level. What matters is how many credible paths to growth the business keeps open.
Growth rate is one way to make that potential concrete. The same source notes that 5% monthly revenue growth implies roughly fifteen months to double revenue. For a company with real sales, a growth figure like this gives an investor something to test. For a company with none, the team, the product and the market have to carry the case instead.
Before choosing a method, the founders need a clear picture of the two figures every round is built on, which the next section sets out.
Pre-money and post-money valuation
Pre-money valuation is what the company is worth before the new round’s cash. Financial Pipeline describes it as how much the company is worth without the new cash of the deal. Post-money valuation is the pre-money value plus the new money invested.
The difference matters because investors measure their stake against the post-money figure. A higher pre-money value for the same cheque means a smaller percentage sold, which is why founders and investors negotiate the pre-money number first.
The two formulas
- Post-money value: pre-money value plus the new money raised in the round.
- Pre-money value: post-money value minus the new money, the same equation rearranged.
- Investor ownership: new money divided by post-money value.
These three lines are the whole mechanism. Everything else in a term sheet discussion is about which numbers go into them.
Calculating dilution after a round
Dilution is the reduction in existing shareholders’ percentage ownership when new shares are issued. It follows directly from the investor’s stake, because whatever percentage the new investors receive comes out of the holdings that existed before the round.
A worked round
Financial Pipeline’s example is a Series Seed deal. The new shareholders put in $1.75 million of new money against a post-money value of $11.75 million. They therefore own 15%, which is the $1.75 million divided by the $11.75 million.
- Fix the post-money value. Agree the pre-money value, then add the new money.
- Divide the new money by the post-money value. The result is the percentage the new investors own after closing.
- Update the cap table. Existing holders now own the remainder, and each of their stakes shrinks in proportion.
A spreadsheet or online dilution calculator needs only the new money and the post-money value to run this calculation. Anything more elaborate, such as option pools or convertible notes, changes the inputs but not the logic.
Dilution is not a loss in itself. A smaller percentage of a company that has raised cash to grow can be worth more than a larger percentage of one that stalled, so the useful question is whether the capital raised moves the business forward enough to justify the stake sold.
Valuation methods for pre-revenue companies
No single method suits every early-stage company. The table compares the approaches published sources describe, and what each needs from the founders.
| Method | How it works | Planning use |
|---|---|---|
| Berkus method | Assigns up to $500,000 to each category, for a total potential value of $2.5 million | Suits companies with little to no sales seeking an angel investor; the $2.5 million ceiling limits how far it stretches |
| Scorecard method | Weights factors such as the management team at 25% in one published version, then multiplies the sum by the average pre-money valuation of similar startups | Needs a credible benchmark of comparable companies in the same sector |
| Venture capital method | Anticipated return equals terminal value divided by post-money value; early-stage targets of 10 to 30 times, depending on sector | Works backwards from an exit estimate, so it suits investors testing a founder’s price |
| Cost-to-duplicate | Calculates what it would cost to develop the company and its product or technology all over again | Gives a floor based on effort already spent, not on future potential |
Berkus and cost-to-duplicate figures come from SoFi’s guide, while the venture capital method figures come from ProjectionHub’s valuation overview.
Berkus method
The Berkus method is primarily used for early-stage companies with little to no sales that are seeking an angel investor. Each category receives a monetary value up to a cap, and the capped total acts as a ceiling on the valuation. That ceiling is also its limit: a company with strong traction will outgrow the method quickly. Founders preparing for that conversation can read how to find angel investors in the guide on how to find angel investors.
Scorecard method
The scorecard method starts from a benchmark: the average comparable value of startups in the same business sector. It then adjusts that benchmark up or down by scoring the company against its peers. Published weightings differ. ProjectionHub, following Bill Payne’s approach, gives the team 30%, the scale of the opportunity 25%, the product 15%, competition 10% and marketing 10%. SoFi’s version puts the management team at 25%. Treat the weights as adjustable defaults and agree them with the investor before scoring.
Because the scorecard multiplies the weighted sum by the original average valuation, its output is only as good as that benchmark. This is where comparable company analysis does its work: a set of similar, recently priced companies supplies the starting number.
Venture capital method
The venture capital method begins with an estimate of what the company could be worth at exit, its terminal value. Anticipated return on investment equals terminal value divided by post-money value, so a required return lets the investor solve for the post-money value they can accept. ProjectionHub reports that expected returns for early-stage startups range from 10 to 30 times, depending on the sector. A higher required multiple lowers the valuation the investor will pay today, so founders should expect investors to push toward the upper end of the range when the exit is distant and uncertain.
Discounted cash flow and its limits
Discounted cash flow values a company by discounting the future value of estimated free cash flows back to the present. It is a standard tool for established businesses. For a startup, the bigger problem is the far greater uncertainty around whatever projections one might make, so a discounted cash flow model is better used as a cross-check than as the headline number.
Choosing a method and testing the range
Match the method to the company’s stage and to who is asking. A founder with no sales and an angel conversation ahead can use the Berkus method for a first anchor. Where a set of similar, priced companies exists, the scorecard method gives a more market-based figure. An investor reasoning from exit value will favour the venture capital method.
Using two methods and comparing the outputs is more informative than trusting one. If the results sit far apart, the assumption that differs most, usually the exit estimate or the benchmark, is where the negotiation will actually happen.
Accelerators often supply a standard price for the equity they take, which sidesteps the methods above. The comparison of programmes in startup incubator vs accelerator explains how that route differs from negotiating with an angel.
Frequently asked questions
How much equity do founders usually give up in a seed round?
Financial Pipeline notes that startups raising capital may issue equity constituting between 15% to 25% of the post-raise equity. That is a general range for a raise, not a rule, and the actual figure depends on the amount raised against the post-money value.
Why can two companies with the same revenue have different values?
Value reflects option potential as well as sales. The explainer’s example is that Facebook at $1 million in ARR was much more valuable than Pets.com at the same level.
Can discounted cash flow value a startup with no revenue?
It can be built, but it is unreliable. The method discounts estimated free cash flows to present value, and for a startup the projections carry far greater uncertainty than for an established company.
What does a dilution calculator need?
It needs the new money raised and the post-money value. Dividing the first by the second gives the new investors’ ownership, as in the worked round of $1.75 million against $11.75 million, which gives 15%.
