How to Model an Investment Offer Before You Respond

To model an investment offer before you respond, give yourself half an hour and run the numbers first: your ownership after close, after the next round, and your payout at three exit prices. Compare the result with your written walk-away. Only then form an opinion.

How to model an investment offer before you respond: the half hour that decides it

The email lands. Someone wants to put money into your business.

Your stomach does something. Flattery, relief, suspicion, take your pick. You want to reply within the hour.

Don't.

The rule is simple and almost nobody follows it: no reaction to a term sheet, positive or negative, until the numbers are run. Not "sounds great". Not "that's outrageous". Nothing.

Enthusiasm and suspicion are equally unreliable. Both are feelings, and feelings are cheap. A fair offer can sound aggressive because one term has a scary name and, in your numbers, doesn't matter. A friendly offer can hide the one clause that decides everything. You can't tell which you're holding by how you feel.

Model an investment offer first, for half an hour of arithmetic. Opinion second. Every single time.

Before you open anything: have your walk-away on paper

The model needs something to be compared against. Without it, you get a pile of numbers and no verdict.

That something is your walk-away, and it has to exist before the offer does. Write down three things:

• The minimum ownership you intend to hold after this round.
• The preference structure you will not go past.
• The control terms you will not concede.

Sign it, date it, and hand it to someone who will read it back to you. This sounds theatrical. It isn't. After weeks of process, the wish to be finished becomes a live participant in the decision. The written version was set by a you who was rested and didn't yet like anyone in the room. It is the only reliable defence you have.

No walk-away written? Stop here and write it. Then come back. The offer will wait. If it won't wait for a day, that tells you something too.

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The five steps, in order

Here is the whole routine to model an investment offer in one table. Run it top to bottom and don't skip the ones you find boring.

Take them one at a time.

Step one and two: get the inputs right

Garbage in, confident garbage out. The inputs are where this goes wrong.

Start with the valuation. When someone says "we're raising at ten", ask immediately which one they mean. Pre-money is the value agreed before the investment. Post-money is that plus the investment. The investor's ownership is calculated on post-money. These are two readings of the same sentence, and the difference between them is exactly the size of the round.

Next, the pool. How big, and is it created before the money arrives or after? Before means you pay for it alone. After means everyone shares it, including the new investor. If the offer has the pool on the wrong side, that is a specific number of points you can see on screen. It is also one of the few places a well-argued counter routinely works, because you are arguing a hiring plan, not a belief. There is more on that in what an option pool is and why it matters.

Then the stack. If you have taken money on convertibles, such as SAFEs or notes, you have sold equity at a price not yet fixed, and it doesn't show on your table until it converts. Convert every instrument together, at its cap or discount, not one at a time in your head and not at the round price. Several instruments with caps well below your new valuation can add up to a block bigger than the round itself.

People get the week-after surprise from exactly this step. Do it before you agree a price, not after.

Step three: your ownership, twice

One calculation covers most of it. The investor's ownership is their money divided by the post-money valuation. Everyone else is multiplied by one minus that fraction.

Read that again, because it is the part people get wrong. You are not losing a fixed number of points. You keep the same proportion of a smaller share. Once that is instinctive, you can sanity-check any offer in your head, which is the point. The model gives you precision. The instinct saves you in the room.

Then do it a second time. Model the round after this one.

A round that looks sensible alone can be one step on a path you'd never have accepted had you seen it drawn out. Dilution is a sequence. Reasonable-looking rounds compound. If you only ever model the one in front of you, you are optimising one move at a time in a game scored at the end. For the arithmetic in full, see how to calculate your ownership after a funding round.

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Step four: the waterfall, and why the bad exit comes first

Your percentage is not your payout. In a sale, proceeds are paid according to the preference stack before ordinary shareholders receive anything.

So enter every class of shares with its terms, then pay the sale price down the queue. Do it three times.

• A disappointing price. This is the one that teaches you something. It is the one nobody models.
• A plausible price. Where you honestly expect to land.
• A good price. Almost every term sheet looks fine here, so it tells you least.

Look at the disappointing line first. If the ordinary line is thin there, you've found the clause that matters. It might be participation, a multiple above the ordinary level, or the way several rounds stack. You're then negotiating something real, not a vibe.

Step five: the test that stops you fooling yourself

You have numbers. Now ask three questions together, because any one alone is meaningless.

1. What do I own?
2. What is it worth?
3. At what exit?

A big share of an under-funded business that can't reach its next milestone is worth less than a smaller share of one that can. So add the question most people skip: does this round buy enough runway to reach the milestone that makes the next round straightforward?

If you finish well-owned and short of the milestone, the offer wasn't generous. It pushed the problem to a day when you'll have less leverage than you do now.

Last, read the terms that decide outcomes: the liquidation preference, anti-dilution, pro rata rights, and board and veto rights. Then check yourself on three points. Have you compared this against at least one alternative, or named why there isn't one? Has someone who has done this before read it and told you what they would push on? Have you slept on it?

That last one is not a joke. It's a control.

Free guide · 25 pagesKnow the cost before you sign.The Dilution Playbook: what raising money actually costs you.Get the free guide →

Model an investment offer so that saying no stays cheap

Here is the payoff. Someone who can run the offer during the conversation and say "that structure puts me below the line I set, here is what would work" is negotiating. Someone who takes the sheet away, then comes back attached to closing, is receiving.

Leverage in a raise comes from alternatives and clarity. You may not control your alternatives. You entirely control your clarity.

And be honest about the limit. A model is arithmetic applied to guesses. You don't know your next valuation, your exit price or whether a down round is coming. So use it to compare: this offer against that one, now against later, raising against not raising. Relative answers are reliable. Predictions are theatre.

If you are still deciding whether this money is right for a one-person business at all, start with whether a solopreneur should raise money. If the clause that worried you was the payout order, what a liquidation preference is explains it.

Free assessmentHow trapped are you, really?Take the Corporate Suffocation Index, the free solopreneur readiness assessment.Take the assessment →

Frequently asked questions

How long should I take to respond to an offer?

Long enough to run the numbers, which is about half an hour of arithmetic, plus time to sleep on it and have someone experienced read the terms. A real offer survives a short, calm delay.

Do I need financial modelling skills?

No. To model an investment offer you need a handful of calculations: ownership after close, the pool, converted instruments and the exit waterfall. The discipline of running them before forming an opinion matters far more than any spreadsheet skill.

Which exit price matters most when I model?

The disappointing one. A good exit makes nearly every term sheet look fine. The mediocre outcome is where preference terms decide who gets paid, and it is also the most likely one.

What if the offer is fine and I model it anyway?

Then you lose half an hour to model an investment offer and gain certainty. It also protects you from the opposite error: treating a fair offer as predatory because a term sounds aggressive when it is immaterial in your numbers.

The full method, with the checklists, is in The Dilution Playbook, a free 25-page playbook.