Between financings there is no price at all, only the last round's number carried forward. And the price paid for preferred stock buys something a common shareholder does not have - which is why two shares issued in the same round at the same price are not worth the same thing in every outcome.
11 min read · Level 3
I think the most misunderstood sentence in this entire asset class is "the company is worth 20,000,000", said about a private company that has just closed a round at that post-money figure. It sounds like an appraisal and it is not one; it is a statement about the terms one investor accepted for the next dollar in, on that specific dollar's specific protections, and those protections are precisely what make the headline number a poor description of what every other shareholder actually holds. A preferred investor at 20,000,000 post-money is meaningfully better protected in a disappointing sale than a common shareholder at the identical implied price, and pretending the two are the same instrument because they share a valuation figure is how people overstate what a round's price actually tells them. What I would want a reader to take from the threshold calculation is not the arithmetic itself but the habit behind it: before treating any valuation as informative, ask what specific rights that price bought, and compute what happens on the downside rather than only on the upside everyone default s to imagining. A price with no rights attached - common stock, an unprotected SAFE that never priced a cap - behaves completely differently from the same number wrapped in a preference, and conflating the two is the single easiest way to misjudge what a given cheque is actually exposed to.
A public share is priced continuously, by whoever is willing to trade at that instant. A private company's shares are priced at discrete moments only - at each financing round, at an acquisition, or at a listing - and between those moments there is, strictly speaking, no price at all. What every cap table shows in the interim is the last round's price, carried forward as a mark, exactly as mark-to-market describes for any asset that does not trade daily. Nothing has actually been verified since; the number is simply the most recent point anyone was willing to transact at.
A round's price is set by negotiation between the company and whichever investor is leading it, informed loosely by comparable companies at a similar stage and sector, but with none of the discipline a continuous market would impose. Take a concrete Series A: the round issues 1,000,000 new preferred shares for 2,000,000 of new money, against a resulting fully diluted share count of 10,000,000.
Price per share 2,000,000 / 1,000,000 = 2.00 a share Post-money valuation 10,000,000 x 2.00 = 20,000,000 Pre-money valuation 20,000,000 - 2,000,000 = 18,000,000 New investor ownership 1,000,000 / 10,000,000 = 10.0%
Those numbers look exactly like a public listing's arithmetic, and that similarity is where the pricing question actually gets interesting, because 2.00 a share of preferred is not the same instrument as 2.00 a share of common - even though both are being priced in the same round, at the same moment, using the same number.
Almost every priced round carries a liquidation preference: a right for preferred shareholders to receive a stated multiple of their investment back - most often 1x - before common shareholders receive anything at all in an exit. That right is what the 2.00 price is actually buying, on top of the ownership percentage. A common shareholder's 2.00 a share carries no such floor; it is a pure bet on the company's eventual value, with nothing paid first if the outcome disappoints.
This is also why a single company can carry two entirely different "fair values" simultaneously. The preferred price from the last round - 2.00 in this example - values what a new investor's dollar buys, preference included. A separate, independent appraisal - required under U.S. tax law to set the strike price on employee stock options, and known by the tax code section that requires it - typically prices the common stock lower, often by a wide margin, precisely because common lacks the preference and lacks any of the other protective rights a lead investor negotiates. Seeing a company's preferred price and its independent common valuation quoted side by side, and assuming they should be equal, is a genuine and common misreading of what a round's price actually represents.
Because the liquidation preference changes what a given exit outcome is actually worth to a preferred holder, and the effect is largest exactly when it matters most: a disappointing sale.
Return to the Series A above - 2,000,000 invested for 10.0% ownership, with a standard 1x, non-participating preference (meaning the holder takes the greater of the preference or their as-converted common share, not both). There is a precise exit value at which the preferred holder is indifferent between the two choices: the point where the preference exactly equals 10.0% of the exit. That point is 2,000,000 / 0.10 = 20,000,000 - which is exactly the round's own post-money valuation, not a coincidence but a direct consequence of how the preference and the ownership percentage were set together.
Below that threshold, the preference binds and protects the investor at common's direct expense. Suppose the company sells for 8,000,000. Pro rata, the preferred investor's 10.0% would be worth 800,000; instead, the 1x preference entitles them to their full 2,000,000. The remaining 6,000,000 goes to common, which held 90.0% of the company and would otherwise have received 90.0% of 8,000,000, or 7,200,000. The preference has moved 1,200,000 from common to preferred, relative to a simple pro-rata split - not through any renegotiation, but because that transfer is exactly what the original round's terms specified.
Above that threshold, the preferred holder converts to common instead, because 10.0% of a larger number exceeds the fixed 2,000,000. At an exit of 40,000,000, converting delivers 4,000,000 rather than the capped 2,000,000 - so above the threshold, the two instruments behave identically, and the preference is simply never exercised.
The practical consequence for pricing is this: a 2.00 share price with a 1x preference is worth strictly more, in every exit scenario below the threshold, than 2.00 of unprotected common - and exactly the same above it. Two instruments priced at an identical number are not identical instruments, and any comparison between a preferred round's price and a common valuation that ignores this is comparing two different things while calling them the same one.
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The same Series A terms as above - 2,000,000 for 10.0% at a 20,000,000 post-money valuation, with a standard 1x non-participating preference - carried through two different acquisition outcomes.
Outcome one: the company sells for 8,000,000, a disappointing result well below the round's own valuation.
Preferred takes the greater of: preference 2,000,000, or as-converted 10.0% of 8,000,000 = 800,000 Preferred receives 2,000,000 Remaining for common (90.0% of the company) 8,000,000 - 2,000,000 6,000,000 What common would have received pro rata 8,000,000 x 0.90 7,200,000 Transfer from common to preferred, caused entirely by the preference 1,200,000
The preferred investor's 2,000,000 cheque returns exactly 2,000,000 - a 1.0x - in an outcome where the company as a whole was sold for well under half of what the round itself had implied it was worth. Without the preference, the same investor would have received only 800,000, a 0.4x, on an identical exit. The preference did not change the price paid at investment; it changed what a bad outcome costs the investor by 1,200,000.
Outcome two: the company sells for 40,000,000, comfortably above the 20,000,000 threshold.
As-converted value 40,000,000 x 0.10 4,000,000 Fixed preference 2,000,000 Preferred converts to common and takes the larger figure 4,000,000
Here the preference is never invoked. The preferred holder receives exactly what a common holder with the same 10.0% would have received, because above the threshold the preference offers nothing the ownership percentage does not already provide.
The two outcomes together show what the round price actually bought: not a fixed multiple of return, and not simple pro-rata ownership, but a downside floor that binds precisely in the range of outcomes an angel investor should expect most often - below the round's own valuation - and disappears exactly in the range everyone hopes for.
Reading a round's post-money valuation as what the company would sell for today. It is what one investor was willing to price the next dollar in at, on the specific terms of that round - not an appraisal, and not a claim that a buyer would pay that figure for the whole company in cash tomorrow.
Assuming the preferred price and the independent common valuation should be roughly equal. They diverge by construction: the preferred price includes a downside floor the common valuation explicitly excludes, and a wide gap between the two is normal, not a sign that either number is wrong.
Ignoring the liquidation preference when comparing two rounds priced at different numbers per share. A 2.00 share with a 1x preference and a 3.00 share with a 2x preference are not simply "more expensive" and "less expensive" versions of the same thing - the second carries a floor twice its own price, which changes its behaviour in every exit below the relevant threshold.
Treating a valuation carried on a cap table as current. Between financing events, the number is a mark from the last transaction, not a live price, and it can be badly stale by the time the next round - a markup, a flat round, or a down round, where the new price is lower than the last one - finally sets a new one.
Forgetting that the preference-versus-conversion decision is calculated automatically at the threshold, not negotiated at the time of exit. The 20,000,000 breakeven in this lesson was fixed the day the round closed; nobody renegotiates it later, and it applies mechanically whatever the eventual outcome turns out to be.
New money divided by new shares gives the price; price times the resulting total share count gives the post-money valuation; post-money minus new money gives the pre-money figure. All three should be stated in any term sheet, and computing them independently catches an error or a misstatement before it is relied on.
A 1x non-participating preference is the market standard in most rounds; anything higher, or anything that lets the investor take both the preference and a pro-rata share, is materially more protective of the investor and correspondingly more dilutive to everyone junior to it.
Divide the liquidation preference by your ownership percentage. In the worked example, 2,000,000 / 10.0% = 20,000,000 - exactly the round's post-money valuation. Below that exit value the preference protects you; above it, it is irrelevant, and knowing which regime a plausible exit falls into changes what the investment is actually exposed to.
The gap between the two is structural, not a pricing error on either side. A common valuation set at a fraction of the last preferred round's price is normal and expected, precisely because common carries none of the downside protection the preferred price paid for.
There is no daily quote to check it against. The only way to update the mark honestly is a new transaction - another round, an acquisition offer, or a documented secondary sale - and until one occurs, the last round's number is doing all the work of describing a company that has likely changed in the interim.
When reading any term sheet or cap table, when comparing two rounds priced at different numbers per share, and whenever a preferred round's valuation and an independent common-stock valuation for the same company are both being quoted and need to be reconciled.
Do not use the threshold calculation to conclude that a 1x preference makes an investment safe - it only changes the shape of the downside within a range of disappointing exits, and it provides nothing at all if the company fails outright, which is the outcome that occurs most often in this asset class. And do not treat a single acquisition offer as proof of a company's value the way a public trade would be; a private negotiation with one counterparty is a far thinner signal than a continuous, liquid market.
Financing rounds are frequently reported, inside a company and sometimes publicly, using the post-money valuation alone - a single large figure that reads as an appraisal of the whole business. What that figure omits is that it was set on the specific terms of the newest, most protected slice of the cap table, and that every other shareholder's actual claim in a disappointing outcome can be worth substantially less than their percentage of that headline number would suggest. The gap is rarely visible until an exit actually occurs and the liquidation preference is applied in practice, at which point it can arrive as a surprise to shareholders who had spent years quoting the valuation as though it applied equally to every share.
A post-money valuation describes the terms of the newest round, not an appraisal of the whole company. Ask what the number would mean for your specific class of share in a below-threshold exit, not only in a triumphant one.
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