The hardest investment rounds to price are seed rounds. They’re incredibly situationally dependent:
- A founder that sold her last company for $400m or IPO’d might be able to raise a pre-seed round at $40m pre (not uncommon).
- A founder with little proof points might be lucky to raise anything at all, and $2m pre might be very generous.
All these pre-money numbers are crazy in the early days because they are all too high based on any sane metrics. There is no way your super early start-up is even worth $1m in the “real world,” let alone $6m! A few thousand lines of code and 1 paying customer is not worth $2m in any rational world. Unless. It’s a hint of something great to come.
Having said that, if you want to dig a layer deeper, what’s really “fair” is a price 1/3rd or less of what the next round investors will pay.
So let’s say you do raise money at $6m pre. Let’s call that $7m post. And let’s add in another $1m for dilution after the round, and call it an effective $8m post. Can you raise another round at $24m+ pre, say $30m+ post, in 18 months or less?
If so, $6m is fair.
If not, it’s a bad deal. It’s way too much risk — versus the next round. Anyone logical would wait and invest later.
This is why so many seed rounds are terrible deals. You’re much better off waiting for the next round, if the price is only 20%, 50%, even 100% higher. Once a ton of risk has been taken out.
If you back into this 3x for the next round for seed, 2x for the next round at Series A and beyond math … you’ll end up with a fair deal all around, that also accounts for risk.
(note: an updated SaaStr Classic answer)