Price per share

Northwind Labs gets a term sheet for its seed round. The investors offer to pay $1.60 for each share. A different startup sells its shares at $40 each. Does the second startup have 25 times the value of Northwind? You cannot know from the two prices. This lesson shows where a price per share comes from, and why the price tells you almost nothing without one more number.

From a valuation to a price

The pre-money valuation is a price for the full company. To sell a part of the company, the round must also put a price on one share. The price per share divides the full price by the number of shares:

Price = Pre-money ÷ Shares before
$1.60 = $16M      ÷ 10,000,000

In this formula, “shares before” means the fully diluted shares before the round.

Northwind has 10,000,000 shares before its seed round. The seed investors agree to a $16M pre-money valuation. Thus each share has a price of $1.60.

The formula uses the pre-money valuation and the shares before the round. The reason is that the investors buy at the price of the company before their money comes in. Their new shares are not in the company yet. If you divide the post-money valuation by the shares before the round, you mix two different times, and you get an incorrect price.

How the new shares come into the company

In a priced round, the founders do not sell their shares to the investors. The company makes new shares and sells them. The money goes to the company, not to the founders. These new shares are primary shares. A sale of shares that a holder owns is a different deal, a secondary sale.

The number of new shares comes from the money and the price:

New shares   = New money ÷ Price
2,500,000    = $4M       ÷ $1.60

Shares after = 10,000,000 + 2,500,000
             = 12,500,000
Investors    = 2,500,000 ÷ 12,500,000
             = 20%

The investors’ 20% is the same as $4M ÷ $20M, the new money divided by the post-money valuation. The two methods always give the same result. As a second test, 12,500,000 shares × $1.60 = $20M, which is the post-money valuation.

Ada, a founder of Northwind, keeps all of her 4,000,000 shares. Before the round, they were 40% of the company. After the round, they are 4,000,000 ÷ 12,500,000 = 32%. Her number of shares stays the same, but the total increases. This is dilution.

The founders and the employees hold common stock. The investors buy preferred stock, which has more rights. The lesson anatomy of a priced round explains those rights. In this lesson, each share counts once in the total.

The share count does not change the deal

Predict first

A twin of Northwind has the same $16M pre-money valuation and the same $4M seed round. But the twin has 100,000,000 shares, not 10,000,000. What part of the twin do the seed investors get?

Type a guess before you continue. A guess first, even a wrong one, makes the answer easier to remember.

Your guessSave my guess

The founders select the first share count when they incorporate the company. The lesson shares and ownership shows this step. The count is like the number of slices in a pizza. If you cut a pizza into 8 slices or into 80 slices, half of the pizza is still half of the pizza.

The count can also change after incorporation. In a stock split, each share becomes more shares. After a 10-for-1 split, a holder of 400 shares at $16 holds 4,000 shares at $1.60. The holder owns the same part of the company, and the shares have the same value.

Thus a price per share without the share count tells you nothing about the size of a company. A $0.16 share and a $1.60 share can be the same part of the same company. A share at $40 can come from a smaller company with a smaller number of shares. To compare two companies, compare their valuations, not their prices per share.

Calculator

From a valuation to a price per share

Change the valuation, the money, and the number of shares. Watch which numbers move and which stay the same.

Pre-money valuation

$16M

New money

Shares before the round

10,000,000

Fully diluted: issued shares, options, and the pool.

Stock split

Split 10-for-1Reverse split 1-for-10

Price per share

$1.60

$16M ÷ 10,000,000

New shares issued

2,500,000

$4M ÷ $1.60

Total shares after

12,500,000

10,000,000 + 2,500,000

Investors own

20%

$4M ÷ $20M

Ownership after the round

• Current holders
• New investors

The company makes 2,500,000 new shares and sells them to the investors at $1.60 each. No current holder sells a share. The 10,000,000 current shares now have a value of $16M, and all 12,500,000 shares have a value of $20M.

The share count does not change the deal. With 100,000,000 shares, the price is $0.16, and the investors still own 20%.

Move the share count from 10,000,000 to 100,000,000. The price decreases from $1.60 to $0.16, and the new shares increase from 2,500,000 to 25,000,000. The investors’ 20% does not move. Then change the pre-money valuation. Now the percentage moves, because the valuation is the price of the company.

Then why do startups not use 100 shares?

A company with 100 shares cannot give a new employee 0.05% of the company, because that is a part of one share. A count of millions of shares lets the company grant small parts of the company without fractions of a share. The count has no other effect on the deal.

Divide by all shares, issued or promised

The 10,000,000 shares of Northwind are not all issued shares. Ada and Ben hold 8,000,000 issued shares. Employees hold stock options on 1,000,000 more shares. The option pool keeps 1,000,000 more shares for new employees, the unissued option pool. All of them can become shares, so the count of fully diluted shares includes all of them.

The fully diluted count before a priced round usually has these parts:

• The issued shares of the founders and other holders
• The shares under granted options
• The unissued option pool, plus a pool increase that the round adds before the money comes in
• The shares that SAFEs and convertible notes become in the round.

The YC Post-Money Safe User Guide writes the price as “pre-money valuation / (total fully diluted shares post safe conversion + option pool increase)”. The NVCA model term sheet sets the price “on the basis of a fully-diluted pre-money valuation”.

Why do investors want the full count? Think of a seed price that divides $16M by only the 8,000,000 issued shares. The price becomes $2.00, and the $4M buys 2,000,000 shares. After the round, the options and the pool become shares. Then the investors own 2,000,000 ÷ 12,000,000 = 16.67%, not the 20% that $4M at a $20M post-money valuation promised.

The full count has a cost for the current holders. Each share in the count before the money comes in decreases the price, and only the current holders own shares at that time. Thus the current holders pay for the options and the pool. Investors use this rule to make founders pay for a new pool. The lesson the option pool shuffle shows how.

Try it

Which shares does the price divide by?

Northwind raises $4M at a $16M pre-money valuation. Select the share count, and look at what the investors get.

Divide the pre-money valuation by

Issued+ OptionsFully diluted

Granted options

1,000,000

Unissued option pool

1,000,000

Price per share

$2.00

$16M ÷ 8,000,000

Shares the investors get

2,000,000

$4M ÷ $2.00

Investors own, fully diluted

16.67%

The deal promised 20%

Ownership after the round, fully diluted

• Founders
• Options and pool
• New investors

At $2.00 a share, the $4M buys 2,000,000 shares. The count does not include 2,000,000 option and pool shares. When they become shares, the investors own 16.67%, not the 20% that $4M ÷ $20M promised.

All 10,000,000 fully diluted shares at $2.00 have a value of $20M. Thus the current holders get an effective pre-money valuation of $20M, not $16M. Investors do not accept this. Term sheets divide by the fully diluted count.

A full example, step by step

Worked example · step 1 of 5

Northwind's seed round, share by share

1. 1

   Count all shares, issued or promised

   Ada and Ben hold 8,000,000 issued shares. Employees hold options on 1,000,000 shares, and the pool keeps 1,000,000 shares.

   Fully diluted shares = 8,000,000 + 1,000,000 + 1,000,000
                        = 10,000,000

Show step 2Show all steps

Now do the steps yourself.

Work it out

Bluebird Robotics has 6,000,000 fully diluted shares and gets a $12M pre-money valuation. What is the price per share?

Your answerCheck

Work it out

Bluebird raises $3M at that $2.00 price. How many new shares does the company issue?

Your answerCheck

Work it out

A term sheet gives a $30M pre-money valuation. The company has 9,000,000 issued shares, 500,000 granted options, and an unissued pool of 500,000 shares. What is the price per share?

Your answerCheck

Compare prices within one company

A price per share tells you the most when you compare it with the previous prices of the same company. Northwind’s Series A has a $60M pre-money valuation, and the company has 12,500,000 shares after its seed. The Series A price is $60M ÷ 12,500,000 = $4.80. The price step-up compares the new price with the previous price:

Step-up = New price ÷ Previous price
3x      = $4.80     ÷ $1.60

Each of Ada’s shares had a value of $1.60 at the seed and $4.80 at the Series A. The price per share also tells you the type of round:

• An up round has a higher price per share than the previous round.
• A flat round has the same price per share as the previous round.
• A down round has a lower price per share than the previous round.

The step-up of the price and the step-up of the valuation can be different. A valuation step-up divides the new pre-money valuation by the previous post-money valuation. Northwind’s seed post-money valuation was $20M, so its Series A valuation step-up is $60M ÷ $20M = 3x, the same as its price step-up.

Now think of a Series A that also adds 1,250,000 new pool shares to the count before the money comes in. The pre-money valuation stays at $60M, but it now divides by more shares:

Shares  = 12,500,000 + 1,250,000
        = 13,750,000
Price   = $60M ÷ 13,750,000 = $4.36
Step-up = $4.36 ÷ $1.60     = 2.73x

The valuation step-up is still 3x, but the price of each share from before the round increased only 2.73 times. The holders from before the round pay for the new pool shares. For this reason, Venture Hacks tells founders to look at the share price, not only at the valuation.

In real documents, the price has a small number of decimal places, for example $1.1144 in a YC example. The company issues only full shares, so the share counts are whole numbers. These small differences do not change the ideas in this lesson. The next lesson, dollars and percent, uses the price per share to follow the value of the founders’ shares from round to round.

Quiz · question 1 of 5

Test what you learned

A Series A has a $20M pre-money valuation and $5M of new money. The company has 8,000,000 fully diluted shares and adds no pool. What is the price per share?

• A$0.625
• B$2.50
• C$3.125
• D$2.00