More is always better.

…says every ambitious person, especially founders.

I follow this motto too!

Just ask my husband who has to talk me down from overdo-ing it at work, health, running, life. 😜🥴🙃

Spoiler alert: there’s diminishing returns and downsides to “more.”

Today, we’re talking about company valuations but these pros and cons apply to other things as well (ahem, high salaries).

If you don’t understand the downsides and tradeoffs of a decision, you’re not ready to make it!

A Primer on Startup Valuations

Your company’s “valuation” is what the market says it’s worth, usually because someone invests money.

Here’s some typical valuation math and how VCs think about investment returns.

These are the two most important valuation formulas that every founder should know!

The Pros of a High Valuation

Most founders want a high valuation when they fundraise for good and obvious reasons.

1. Less dilution

The higher the valuation the more ownership you, the founder, retains.

• If you raise $1M on a $5M post money valuation, that’s 20% dilution.

• If you raise $1M on a $10M post money valuation, that’s 10% dilution.

2. **OR** more money for the same dilution

Let’s use the same math as above:

• If you raise $1M on a $5M post money valuation, that’s 20% dilution.

• If you raise $2M on a $10M post money valuation, that’s 20% dilution — but you get another $1M of investment!

3. Market signal

High valuations announce “WE ARE AWESOME” to important people:

• Your competitors

• Future investors

• Current employees

• Top talent that you want to recruit

• Customers

• Your family member who thought law school was a better idea 😉

4. Validation of your sacrifice and hard work

You’ve been grinding.

You’re years away from an exit, but a high valuation is a milestone.

It’s been worth it.

Someone believes in you and the future!

5. Money solves (some) problems

If your higher valuation means raising more money, that can be helpful.

You can hire more people. You can give yourself a raise.

You don’t have to be the sales person, and marketer, and office manager all at the same time.

You take on new challenges and grow as a leader.

BIG caveat though: with more funding, goals get more aggressive.

So you have more money but you also have more to accomplish.

But we’ll get to that…

The Cons of a High Valuation

Founders often share the downsides of a high valuation quietly and privately, wishing they’d known ahead of time.

Never learn it the hard way when the O’Daily can give you an overview!

Now you can thoughtfully decide for what’s right for you.

1. Slow or no fundraise

If you go out to market with a (too) high valuation, investors may pass even though they really like you and your company.

You may think investors will negotiate and offer a lower valuation.

They might. If the valuation is close.

But often, they will politely and vaguely pass.

They don’t want to burn bridges or offend you by saying your beautiful $10M baby is more like a pretty cute $5M baby.

2. No wiggle room

When impressive founders go out to raise a seed or pre-seed at a high valuation, they often can.

They’re fantastic. Someone will take a chance on their ability for a grand slam.

But what they often overlook is the future math.

In successful startups, valuation doubles every fundraising round.

With a high valuation — especially in the early stages — you need excellent, near-perfect execution to hit the metrics to unlock the next fundraising round.

In seed or pre-seed, you can raise on a vision and great story.

Series A and beyond, you need stellar KPIs (e.g. ARR, CAC, LTV).

There’s little room for sales misses, hiring mistakes, or product pivots.

Which (spoiler alert) are extremely common and normal for early stage companies!

With a fair-but-not-too-high valuation, you give yourself room to run.

If company performance is good but not great, you can raise again under favorable terms, will have more investors at the table, and you keep your employees solvent and happy.

Play it the other way and you have an amazing founder with a great idea who made progress…but has to take a down round or close shop.

It’s heartbreaking.

Companies with great potential, doing good work, helping customers, but hindered by high expectations out of the gate.

A high school star with a strong college career who feels like a failure.

I know multiple founders who have said:

“I’m really glad I didn’t get that high valuation last round because we’d be dead right now. Instead we have outlasted others, we’re hitting our stride, and the team is more fired up than ever.”

3. A messy term sheet

A “clean” term sheet means fair and normal terms for the founder without any weird covenants or complicated payback waterfalls.

One thing that can happen with a high valuation is that investors agree but they include “protections” in the term sheet.

“We’ll give you the high valuation you want, but in return, we want to mitigate the risk, so we need to add more contingencies to the deal.”

^^If term sheets could talk.

Run different valuation scenarios through GenAI comparing these terms:

• Non-participating preferred

• Participating preferred

• 2x participating preferred

Remember: startup news doesn’t tell the whole story! That big raise announced by your competitor doesn’t mention all the “hair” on the deal.

Know what comes along with the high valuation!

4. Lose what makes you great.

Scrappiness is not always fun but it’s incredibly valuable.

You are forced to:

• Listen deeply to customers

• Understand exactly what people will pay for

• Get creative with marketing campaigns

• Test messaging to see what resonates

• Use AI to do more with less

• Find smart, ambitious talent that punches above their weight class

A risk of a large round is losing your competitive edge.

High valuation → aggressive targets → scale at any cost.

Another variation:

Big raise → big goals → big spending → big miss → big uh-oh.

By the time you realize that it’s not working, you’ve spent millions building or selling the wrong thing.

5. No exit path

Can you imagine turning down a purchase offer over a billion dollars?

I know a startup that did.

It wasn’t enough money to provide a good exit given how much they raised.

I worked at several startups who stayed lean, especially compared to competitors.

At the time, we grumbled and worried about having fewer resources:

• Smaller team

• Fewer marketing dollars

• Less product development

BUT we were wildly grateful when large companies started buying businesses in our space!

We had many suitors and some of our well-funded competitors were considered “too expensive.”

The “Goldilocks” Valuation

So what’s the valuation that’s not too high, not too low, but juuuuust right?

1. Be clear (to yourself) what you’re optimizing for.

• Do you want the highest valuation at all cost?

• Would you rather have an ideal partner at a lower valuation?

• Is exit optionality important to you?

The right valuation for you may be different than another founder.

2. Pay attention to market signals.

You can study the data and analyze the news all you want. But ultimately getting (or not) a term sheet tells you if your valuation is correct.

The market will let you know.

3. Fair and reasonable valuation and terms from a good partner.

Easier said than done but imho THIS is the Goldilocks valuation. Something that both sides are happy with. Fair but room to grow. Aligned on the important stuff. No surprises. A great long term partner.

Not too hot. Not too cold. JUST RIGHT!

Any other pros or cons of a high valuation? What do you think makes a good valuation? What did you optimize for?