पाठशाला Pathshala · धन Dhan, Money · Lesson 08 · Start

Seed valuation: how the number really gets set

A seed valuation is not a verdict on the company. It is a stake the investor needs, divided into a cheque the company needs, adjusted by a pool nobody mentions in the announcement.

Pathshala, The Founder Library · 11 October 2026 · 9 min read

Two hands hold a ring under a jeweller’s loupe above a workbench scattered with sketches. — Photograph: Andrea Piacquadio · Pexels

Founders walk into a seed negotiation believing the valuation is a judgement on the company. It is closer to a division sum. The investor brings the denominator, the company brings the numerator, and the number in the press release is what falls out.

This lesson takes the sum apart. Where the investor’s side of it comes from, what comparable rounds can and cannot tell you in India, how the option pool moves the price without moving the headline, what the registered valuer’s report is for, and which parts of the sum are worth negotiating. The figure in the middle lets you change each input and watch the founders’ stake move.

A price is an ownership decision written backwards

A company with six months of revenue and a product that will change twice before Series A has no cash flows to discount. Every method that values mature businesses fails here, and experienced investors do not pretend otherwise. What they do instead is decide two things and let arithmetic produce the third. They decide what share of the company their fund needs to own. The founders, ideally, have decided how much money takes the company to a milestone the next investor will pay for. The post-money valuation is the second number divided by the first.

A worked example. A Bengaluru company selling software to clinics needs ₹4 crore to reach ₹1 crore of annual revenue in eighteen months. The lead fund wants twenty per cent. The post-money is therefore ₹4 crore divided by 0.2, which is ₹20 crore, and the pre-money is ₹16 crore. Nobody valued the clinic software. Two people stated what they needed and the valuation was the residue.

Seen this way, the range of seed valuations stops looking arbitrary. Carta’s benchmark of over a thousand rounds raised in the six months to July 2026, all American software companies, put median seed dilution at eighteen per cent. Indian funds state their targets openly: Blume Ventures describes itself as a seed and pre-Series A fund whose investments typically range from ₹12 crore to ₹24 crore for a stake of twelve to twenty per cent. Divide one by the other and the post-money is between about ₹60 crore and ₹200 crore. The cheque and the stake came first; the valuation is a consequence.

Where the investor’s number comes from

The stake comes from the fund, not from you. A seed fund knows that most of its companies will return little and that one or two must return the whole fund. If it owns too little of the winner the winner cannot do that, however large it becomes. So each fund sets a minimum ownership at entry, adjusts it for how much it expects to be diluted in later rounds, and walks away from rounds that leave it below the line. That is why a fund will often accept a higher price in exchange for a larger cheque that keeps its stake, and will rarely accept a smaller stake at any price.

The round size comes from the plan. The honest version is the money needed to reach the next milestone with six months to spare, which is a runway calculation rather than an ambition. Founders who raise more than the plan needs are not raising at a higher valuation; they are selling a larger stake, or asking an investor to accept a price that the stake arithmetic does not support.

The third force is competition, and it only moves the number at the edges. Paul Graham’s description of how it works in How to Raise Money is exact: your initial valuation, or valuation cap, will be set by the deal you make with the first investor who commits, and by default that number becomes the asking price for everyone after. A second credible lead can move it. A dozen polite meetings cannot.

Comparables, and why Indian ones are hard to read

Investors will tell you that the price reflects comparable rounds, and they will mean it. The difficulty is that most Indian seed rounds are never priced in public. Announcements give the amount and the investors; the valuation appears months later in a company filing, after conversion of the convertibles, net of a pool and on a share count the reader cannot reconstruct. The comparables a fund carries in its head are its own portfolio and the deals its partners heard about, which is real information, but it is information you do not have.

A vintage balance scale stands in a museum display case in black and white. — A comparable is only useful if you can see both pans. Most Indian seed prices are weighed where founders cannot see them. Photograph: Efe Ersoy · Pexels

Two practical steps close the gap. Ask each investor directly which three companies they consider comparable and at what stage those companies raised; most will answer, and the answer tells you how they see you. Then ask the founders of two of those companies, who will usually tell you what they gave up for what. The American benchmarks are useful as a ceiling rather than a guide: Graham’s point that the first investor sets the price holds everywhere, but the dollar level of American seed rounds does not travel.

The option pool shuffle

The largest adjustment to a seed price is usually not in the headline at all. Almost every term sheet asks the company to create or top up an employee option pool, sized as a share of the post-money, and to create it before the investor’s money arrives. The pool is therefore paid for entirely by the existing shareholders, which at seed means the founders.

The effect has a name. In The Option Pool Shuffle, written in 2007 and still the clearest account, Venture Hacks works an offer of $2 million at an $8 million pre-money with a pool of twenty per cent of the post-money. The pool is worth $2 million and sits inside the pre-money, so the founders are really being paid $6 million for their shares. A pool sized to a real hiring plan at ten per cent lifts the effective pre-money to $7 million and the price per share by about seventeen per cent.

Put the clinic software company through the same sum. ₹4 crore for twenty per cent with a ten per cent pool in the pre-money leaves the founders with seventy per cent and an effective pre-money of ₹14 crore, not ₹16 crore. Move the sliders and watch the two bars disagree.

Now compare two negotiations. In the first the founders argue the headline from ₹16 crore to ₹18 crore and accept the ten per cent pool: the post-money becomes ₹22 crore, the investor owns 18.2 per cent and the founders keep 71.8 per cent. In the second they leave the headline at ₹16 crore and show, from a hiring plan, that five per cent covers every hire until Series A: the founders keep seventy-five per cent. The quieter argument was worth more than the louder one, and it is easier to win because it rests on a document rather than on pride.

Nobody values a seed company. Two people state what they need, and the valuation is the residue. Negotiate what you give up, not what it is called.

What the valuer’s report does and does not do

Indian law adds a step that founders often mistake for the price itself. Shares issued by private placement in an unlisted company must be priced on the basis of a valuation report from a registered valuer under rule 13(2)(g) of the Companies (Share Capital and Debentures) Rules. If any investor is outside India, the foreign exchange rules add a floor: the issue price may not be less than fair value worked out by an internationally accepted method and certified by a chartered accountant, a SEBI-registered merchant banker or a practising cost accountant.

Neither report sets the negotiated number. The valuer is shown the term sheet, builds a discounted cash flow or a comparables case that supports a price at or below it, and certifies. What the report does is make the negotiated price defensible, and it matters in one direction more than founders expect. With the angel tax gone (the lesson on [friends and family money](/library/friends-family-and-first-25-lakh) sets out the change) a high price no longer invites a tax inquiry into the company, but a price set below fair value for a non-resident is a foreign exchange breach, and one set below fair value for a resident can be taxed in the investor’s hands. Commission the report after the term sheet and before allotment, and give the valuer the investor’s model.

Negotiating the ownership rather than the headline

Set a dilution budget before the first meeting. Decide the most the founders will sell in this round, pool included, and work every offer back to that number. Carta’s median of eighteen per cent is a fair anchor for the investor’s share alone; add the pool to it, then run the next two rounds through the [dilution figure](/library/dilution-a-cap-table-you-can-touch) to see what the founders hold at Series B.

Size the round to the milestone, then stop. Every extra crore is another slice at the same price. If an investor offers more money than the plan needs, the right answer is often a smaller round at the same stake, which is a higher price.

Bring a hiring plan to the pool conversation. List every hire to Series A, the grant each will need and the month they join; total it; add a margin. The pool the plan supports is the pool to agree, and investors accept a well-made plan more often than founders expect.

Use competition honestly. A second lead is the only reliable way to move the price; a deadline you can defend is the only way to make the second lead decide. Never invent either.

Trade price for partner when the gap is small. Graham’s ranking is blunt: the money you need comes first, good investors second, and valuation is at best third. A fund that will lead the next round, take the call when the plan breaks and introduce the first ten customers is worth a pre-money a few crore lower. The [term sheet](/library/term-sheet-clause-by-clause) clauses that follow the price matter more than the last crore of it.

Before you name a number: the one-page check

Before the first investor meeting of a raise, and again the day a term sheet arrives, fill in one page. The milestone the money must reach, in a number and a month. The round size that reaches it with six months to spare. The dilution budget, pool included. The pool the hiring plan supports. From those four lines the target post-money writes itself: round size divided by the investor’s stake, with the pool on the founders’ side of the ledger. When an offer arrives, put it through the figure above, read the founders’ stake rather than the headline, and compare it with the budget. If the stake is inside the budget, the remaining arguments are about partners and terms. If it is outside, change the round size or the pool before you argue the price. Keep the page in the data room folder for the next round; it is the record of why this number was right.

Nothing here is legal, tax or investment advice. Valuation and pricing rules were checked on 11 October 2026 and change by notification; the registered valuer and a company secretary who has closed a round are the people to confirm them for your issue.