Start with the question a venture investor actually asks. Not "what is this company worth today", which nobody can answer, but "if I put in eight million dollars and this works, what fraction of the exit do I need to own to have made this worth doing".
How is the venture capital method calculated?
Redwood Vector, Inc. (synthetic) is a US enterprise-software company raising a Series A. The investor's committee has three inputs and no more. An exit value of $240 million, six years out, in the case where the company works. A target multiple of 10x on invested capital, which is the fund's own hurdle for a Series A position, chosen because twelve of twenty positions will return nothing. And an investment of $8 million.
The method runs in four steps and each one is a division.
First, the future value the stake must reach: 8 × 10 = $80 million. Second, the ownership that produces it: 80 ÷ 240 = 33.3333%. Third, the adjustment nobody skips twice. Between now and the exit the company will raise again, and every subsequent round dilutes this position. If the investor expects to retain 0.75 of today's stake through those rounds, the ownership required today is 33.3333 ÷ 0.75 = 44.4444%. Fourth, the valuation that ownership implies: post-money = 8 ÷ 0.444444 = $18.00 million, and pre-money = 18 − 8 = $10.00 million.
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The pre-money valuation is an output, not an input. It is the last thing computed, and it is computed from a required return, an exit estimate and a dilution guess. When a founder and an investor argue about a pre-money number they are usually arguing about one of those three without saying so.
The target multiple and a discount rate are the same statement in different clothes. A 10x over six years implies an annual rate of 10^(1/6) − 1 = 46.78%, and discounting the $240 million exit at 46.78% for six years returns exactly $24.00 million, the undiluted post-money. The gap between $24.00 million and the $18.00 million actually offered is the expected-dilution adjustment, priced. Say the rate out loud once and the number stops looking predatory. The 46.78% forecasts nothing whatever about this company. It is the rate at which a portfolio of twenty of these, of which one works, breaks even.
A founder hearing 46.78% hears a demand. A fund partner saying it hears an average.
Common mistakes with the venture capital method
Two failure modes are worth naming now, because both survive into professional work. Applying the discount rate to a probability-weighted exit value double-counts risk, since the rate already embeds the failure rate. And applying the retention ratio to the exit ownership rather than to today's ownership inverts the adjustment: 33.3333% multiplied by 0.75 returns 25.0000% where 44.4444% is required, an understatement of nearly half. Skipping the retention adjustment altogether is the milder version of the same error, and it understates the stake by exactly the retention ratio, a quarter.