Key valuation terms you should know

As a founder, you’ve probably come across terms like “pre-money valuation” and “discounted cash flow” in conversations about your company’s worth.

Whether you’re preparing for a funding round or planning to sell shares, nailing down an accurate valuation is essential—not just for transparency, but for building trust with stakeholders.

But to get there, it’s crucial to understand the key terms and factors that shape these valuations. So, what do these phrases actually mean? And how can mastering them empower you to make smarter decisions and confidently grow your business? 

Let’s dive in.

16 terms you need to know

1) Pre-money valuation

This is the valuation of your company before receiving new investment.

2) Post-money valuation

The value of your company after investment. It is calculated by adding the investment amount to the pre-money valuation. Although it is simple maths, it is critical in understanding equity dilution. 

For example, if you were to raise £100k in exchange for 10% of your company, the implied post-money valuation would be £100k/0.1 = £1m. 

This follows that the pre-money valuation is £1m-£100k = £900k.

3) Equity value

This focuses purely on the value of shareholder’s equity—essentially the total value of the company’s shares.

4) Enterprise value (EV)

A more broad measure of your company’s worth, calculated by combining equity value and net debt. It is what investors use to assess the total value of your business.

5) Discounted cash flow (DCF)

A valuation method that estimates the value of a company, taking into account future cash flows and interest.

6) Comparable company analysis

This is the process of comparing your business’ value to similar companies, using similar metrics as grounds of comparison. It generates a valuation ratio that can determine whether a business is being over or undervalued.

7) Burn rate & runway

These two are implicated within one another, so it is useful to think of them as hand in hand. Your burn rate is the rate at which you are spending money.

Runway uses the established burn rate to decipher how long you can sustain operations before you run out of cash.

Both factors affect how investors view your financial health, and can determine whether they see their investment as viable and lasting.

8) Cap table

Your cap table shows the breakdown of ownership of your company, and so maintaining a clean and clear one is essential for valuation discussions. Investors want to see exactly how their stake fits in with existing shareholders.

9) Dividends - Gordon Growth Model

For dividend-paying companies, the Gordon Growth Model may be used to calculate company valuation through dividends. It does this by predicting future dividends at a constant growth rate, and discounting them to the present value.

This model is rarely used for early-stage businesses, but can be valuable for more mature companies.

10) Exit value

The value of your company at the point of being sold or merged. Investors often use this to calculate potential returns.

11) EBITDA 

Earnings Before Interest, Taxes, Depreciation, and Amortisation—this is a way to value a business that removes non-operational costs. This is handy in calculating its operating profit.

12) PE ratio & EV/Revenue & EV/EBITDA

These metrics are widely used to gauge company valuation, by offering quick comparisons against other businesses in similar industries. These are specific methods that may be used in comparable company analysis. 

• PE ratio compares your company’s market value (price) to its net earnings. It’s calculated as:

PE Ratio = Share Price / Earnings Per Share (EPS)

• This ratio compares your company’s enterprise value (EV) to its revenue. This helps investors gauge whether your valuation is fair against others in your sector:

EV/Revenue = Enterprise Value / Revenue

• This metric measures your company’s EV relative to its earnings before interest, taxes, depreciation, and amortisation (EBITDA). This provides a profitability focussed perspective, stripping out non-operational costs.

EV/EBITDA = Enterprise Value / EBITDA

13) Rule of 40

This is a key metric used to evaluate the balance between growth and profitability, and is particularly used in SaaS companies. It’s calculated by adding your annual revenue growth rate to your EBITDA margin:

Rule of 40 = Revenue Growth (%) + EBITDA Margin (%)

A percentage of 40% or higher is ideal, as it shows the ideal trade off between operational efficiency and growth. 

14) Berkus method

This is a way to value a startup using qualitative factors. It assigns a monetary value to aspects of your business such as idea, team, and market potential. This is particularly useful for pre-revenue startups, as it places value on potential.

15) Scorecard method

The scorecard method benchmarks your startup against similar companies to determine its valuation. It assigns weights to various factors, such as product, team strength, and opportunity size. This can also be used when valuing a pre-money startup.

16) Asset-based approach

The asset-based approach calculates the valuation based on the value of its assets, either tangible (equipment, property) or intangible (patents, trademarks). This is particularly effective for companies with significant physical or intellectual property assets.

There are two common methods with this approach:

• Cost to duplicate method - this calculates the cost to recreate your business from scratch
• Book value method - relies on your company’s balance sheet to calculate the value of assets minus liabilities. This can also be called the ‘net worth’ of the company.

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Company valuations can feel complicated, and the technical jargon only serves as a roadblock to some founders looking to undergo an important valuation.

Whether you're preparing for a funding round or planning your next big milestone, understanding these concepts will help you have more productive conversations with investors and advisors.

At Vestd, we’re here to help you navigate the ins and outs of fundraising and equity, to simplify your journey. Ready to take the next step? Let’s chat.