The way to price a pre-seed round

How do you properly price an early-stage round? I’ve had this conversation so many times with founders over the years. Recently, I’ve been pointing them toward this brilliant article written by legendary investor, 🧬 🤖 ⚙️ Alex Iskold.

In it, he makes a great argument for how founders should approach a pre-seed valuation: The founder sets the opening price, then offers tranched post-money SAFEs at different valuations.

Here’s how he explains it:

“ - The founders announce, or agree with the earliest investor, that the round will be raised in tranches

- They are willing to take up to $X1 on a cap $Y1, up to $X2 on a cap $Y2 and maybe up to $X3 up on a cap $Y3

- The amount and caps should be set upfront, and there should be no more then 3 to make sure it is not a perpetual raise

- There is an official term sheet that captures all of this so that there is clarity on what will happen in advance

- Use standard post-money YC SAFE to create clarity on all the actual equity that founders are selling and investors are buying”

It’s similar to how some consumer product companies will offer tiered, early-bird pricing that increases as more people purchase the product.

Some investors complain that a system like this is unfair because they can no longer invest at the same price set by the lead investor.

But that’s the whole point.

Venture investing is a game of generating risk-adjusted returns. The cost of capital (valuation) has always been correlated to the risk of the investment. A tranched valuation is an effective way of pricing the risk taken by the first funds to wire money in a raise.

If you’re an early-stage founder who plans on raising soon, this will be one of the most important pieces you read this year.

https://www.startuphacks.vc/blog/pre-seed-pricing-model