🎰 Valuation vs. 🛠️ Milestones
24th May, 2026
Valuation vs Milestones
Today we’re going deep into “turpentine” territory…
Let’s imagine a promising high growth startup, that has just announced a significant funding round:
Acme Inc raises $30 million, valued at $100 million
Journalists are generally delighted to publish headlines like this, often lifting them directly from press releases without too much investigation.
The hero of the story, if not the headline, is nearly always the valuation. In fact, it’s sometimes the only reason there’s a story, especially if it’s a nice round number like $100 million or even $1 billion (the mythical “unicorn”).1 The implication is that founders and existing shareholders have hit the jackpot.
It’s actually the least useful number in the whole transaction. Not because it’s wrong, but because it’s so often completely misunderstood - by founders, by investors, by journalists, and as a result by the general public reading the news.
We can expand on this hypothetical example to expose some of the complexity hiding just beneath the surface…
The two co-founders of our fictional Acme Inc2 have been working in the business for years, and have already raised multiple rounds of investment: initially a $500,000 seed round cobbled together from direct contacts who were willing to back them right at the beginning, before there was much evidence to inform that decision, then more recently $3 million in a so-called “Series A” round from a local venture fund.
They’ve used that funding to build the early versions of their product, and start to understand the problem it solves for customers. They have shown they can attract other smart people to work with them and help them scale. They have demonstrated they can sell what they’ve made and their revenue is growing quickly as a result. That earns them conversations with larger investors. But it’s their plans for the future that get new investors excited to be involved. Specifically, how they believe they can use the additional capital to grow even bigger.
In reality, raising a round of that size is nothing like winning the jackpot.
Dilution
The headline makes it sound like Acme Inc is already worth $100m. That’s true in a narrow mathematical sense. But it’s also misleading. In this $30 million Series B round all of the existing investors, including the founders, are actually further diluting their ownership, and in the process hoping for an even bigger valuation in the future.
We can calculate this:
Let’s say there are 100 million shares. The co-founders have 26 million each, the seed investors have 13 million, split between them, the venture fund who invested at Series A has 25 million, and there are another 10 million shares allocated to the ESOP scheme.3
To accommodate the new investor the company will create 30 million new shares and sell them for $1 each. That means there are 130 million shares in total. The new investor will own approximately 23% of the company. Or put another way, the existing investors have been diluted by 23%.
I’m not just choosing random numbers in this example. Over all the years I’ve been investing in real startups, across multiple rounds of different shape and sizes, when we sum up all of the dilution that happens in a round, it nearly always ends up somewhere between 20 and 30%. It’s a useful rule of thumb.
That counts the new investors’ stake, but several other things need to be included. New investors almost always insist on topping up the employee share option pool as part of the round. That’s further dilution. The deal might also be a mix of primary capital (new money into the company) and secondary sales (existing shareholders selling shares to the new investors). In our hypothetical we’ve assumed the full $30 million goes to Acme Inc, but the headline would look the same if $10 or even $20 million was secondary, with much less actually landing in the company bank account. And if the company struggles to hit its milestones six or twelve months later, a bridge round adds another layer on top. By the time you add it all up, real dilution often sits at the top of that 20 to 30% range, or beyond.
These details are seldom included in the press release.
All of these transactions are an exchange of value. Investors swap cash for shares. The existing shareholders are on the other side of that trade - either collectively or individually.
An “exit” (where 100% of the shares in the company are sold at once) and a capital raise (where a smaller percentage of the shares in the company are sold) are structurally very similar transactions. But they’re perceived very differently. An exit feels like the founders are giving something up. A capital raise feels like they’re achieving something. The mechanics are nearly identical, even if the psychological framing isn’t.
Preferences
The second misconception is that all shares are created equal. In reality, new investors typically get preference shares while founders have ordinary shares. As the saying goes: “you set the price, I set the terms”.
What does it mean to have a preference?
In the simple case it means that if the company is eventually sold, the preference shareholders get a choice: either take the original value of their investment in cash, or convert their preference shares into ordinary shares and take a percentage of the total sale price. Whichever is larger.
Let’s take the $30 million invested in Acme Inc. Assuming that was for preference shares, in an exit the investor can choose to get their $30 million back or convert to ordinary shares (which, remember, represent 23% of the total number of shares).4
If the company is one day sold for $100 million (our “headline” valuation today) they would compare their $30 million preference against their 23% share of the proceeds (about $23 million) and take the preference. That leaves $70 million for the ordinary shareholders.
If the future sale price is, say, $200 million, the preference shares would convert and be worth just over $46 million.
Note: Doubling the value of the company only produced a 1.5x return. That’s a real return (certainly better than nothing!), but not even close to the outcome that venture investors are hoping for when they invest. That’s why investors care so much about price and terms.
If the sale price is less than $30 million, that’s really bad news for the ordinary shareholders as the preference shareholders would take the full amount of the sale.
This last-in-first-out arrangement seems a sweet deal for the most recent investors. But the alternative creates unhelpful misalignment between founders and investors: without preferences, a quick sale at a modest price could leave founders and earlier investors with most of the proceeds and the recent investors well underwater on what they put in.5
Of course, that floor only applies if there’s anything to distribute. In the more likely scenario that the venture fails, preference shares are worth no more than ordinary ones, which is to say, nothing.
There’s a further wrinkle:
Acme Inc has earlier investors from the first two rounds. If those investors also got preference shares then, combined, there are now three layers of preferences: $33.5 million total.
When we stack these up, we get a waterfall. The most recent Series B investors get first dibs. Then the Series A and Seed preference shareholders. Only after all of those preference layers are paid do the founders, who have ordinary shares, see anything for their efforts.
Now imagine you’re a journalist trying to write a story on top of that press release. If you do the work you can look up the shareholdings from the Companies Office6 but those only show the number of shares not the class of shares. So we can see the co-founders each have 20% of the shares but can only speculate about the preferences that might sit on top of them.
It gets even messier:
Early stage companies like Acme Inc also frequently issue options to employees and contractors. Those options don’t show up in the shareholder register at all, until they vest and are exercised (when they convert to shares). For tax reasons employees often hold off exercising vested options as long as possible. So the real ownership picture is almost always significantly more complicated than it appears in any public document.
Which brings us back to dilution:
When we see that headline that says a company raised $30 million at a $100 million valuation, we might think “that’s only 23% dilution, the founders have done well”. But buried in the fine print are the details we’d need to really understand if that’s true or not.
What founders are really doing is betting that the exit will be significantly larger than the round valuation. If it lands at or below that mark, their effective stake is worth materially less.
The headline number was technically true. It just wasn’t the whole truth.
Liquidity
Finally, when we consider liquidity, the simple headline really falls apart.
Even accounting for the preference stack and options that are yet to be issued, vested or exercised, the founders still own shares worth $20 million. On paper.
But in every practical sense those shares are only worth as much as somebody else will pay for them. Despite the headline, the founders haven’t actually banked anything. At least, not yet. They can’t sell their shares. So, for now, those shares are worthless.
The moment a company raises capital, it commits that capital to achieving certain milestones. Potential buyers will watch with interest. But the opportunity to one day sell to them is a function of execution.
If we plot the real value of shares in an early-stage/high-growth company over time, it would be basically flat at zero, with tiny spikes whenever the company raises capital, and only then if there’s an opportunity for a secondary sale. Hopefully, one day, they will be worth a lot in an exit. But between those fleeting moments, for months or years, the shares are illiquid. It’s effectively impossible to sell them.
Recently, secondary sales between funding rounds have become a little more common in situations where the company is really growing fast (generating FOMO from potential investors) and the founders are willing to sell at a discount. Shareholders’ agreements often include mechanisms that allow people to sell, usually with significant restrictions. But those come with real constraints. If you’re a founder trying to sell ordinary shares in a company with a preference stack sitting on top of them, buyers are going to discount you twice: once because it’s a secondary sale, and once because ordinary shares are worth less than preference shares. You’re unlikely to get the headline valuation.
This affects investors too, not just founders. An investor might own preference shares nominally worth $30 million, but if the company hasn’t hit its milestones, nobody’s buying. The headline valuation is entirely theoretical until there’s actual proof that the company is worth that much.
A Different Story
I acknowledge that journalists have an impossible job in this situation. What should they write when Acme Inc makes this announcement?
I’d love to see them start with the use of funds. What does the company say it’s going to do with this $30 million? That’s the real story. Not the valuation. The plan. Is there substance? Is it believable? Or are they mostly just spraying and praying?
Then, come back in 12-18 months and ask: Did they do it? Or not?
If Acme Inc consistently raises money, spends it on the things they said they would, and hits their milestones, that’s a very positive signal about the founders and the investors involved. If we start to see a pattern - raise, promise, deliver - that tells us something credible about the quality of the execution from the team.
On the flip side, if we see a company raising money and then coming back a year later to raise more money because they didn’t hit their milestones, that’s real information too. And over time, if we’re paying attention, we can separate the signal from the noise. We can spot which founders and investors actually have good judgment from those who are just good at writing press releases.
The valuation itself? That’s just the number that determines how much ownership the investors get. It matters to the investors because their return depends on it - not because of what it implies about the company today, but because the percentage they end up with in an exit is a function of the valuation and terms they agreed to invest at.
A bigger number definitely gives the press release a little more sting. Perhaps that’s what so often causes founders to focus on it, hoping to attract some new team members or give their competitors a fright. They let their ego rule. But in the process they miss a rare opportunity to talk about the customer they hope to serve and the problem they have solved with the product they have built.
For everybody else looking in from the outside, the numbers in the headline don’t mean much at all. What matters is whether the company is actually building something valuable, and whether the people running it are telling the truth about what they’re doing and where they are up to.
Stop quoting valuations. Start asking about milestones.
Buy the book…
Image Credit: The “milestone” or “borne du kilomètre zéro”, in Bordeaux, France.
A label first coined by Aileen Lee on TechCrunch in 2013 - strictly speaking it’s USD$1 billion, which at today’s exchange rates is closer to NZD$1.7 billion. Even more if adjusted for inflation.
Strictly speaking Acme Inc Limited, since the company is presumably registered in NZ, not in the US!
If you’re interested in the maths, this implies the pre-money valuation for the seed round of $2.5 million and $9 million for the Series A, and an ESOP pool created as part of the Series A round to be 10% of the shares post-money.
That itself assumes there hasn’t been any further capital raised.
For example, a $60 million exit for Acme where all shares are ordinary shares would see founders and existing investors taking $46.2 million while those who most recently invested $30 million would only get $13.8 million in return.