Valuation, Pre-Money vs Post-Money, and Dilution

Imagine Mr A and an investor sit down to agree a price for 20% of MANIAC MINDZ. Mr A says the business is worth ₦30,000,000. The investor says ₦15,000,000. Both are guessing, and both believe their guess. There is no receipt, no price tag, no official number anywhere that says what a business is worth. So who is right?

Chapter 3 taught the arithmetic: pre-money + investment = post-money; investment ÷ post-money = investor's %. This chapter answers the question that arithmetic quietly assumed away:

And then it follows the consequences of that number through multiple investment rounds, dilution over time, price per share, and how founders keep control of their company.

Method 1: Asset-Based: "What does it own?"

Add up everything the business owns, subtract everything it owes. This is the floor, the business can hardly be worth less than its stuff.

Notice what it misses: the pattern library, the 7-year on-time reputation, the waiting list, everything that makes MANIAC MINDZ a machine rather than a pile of machines. Asset-based suits asset-heavy businesses ( the farm's land!) and worst-case thinking (it's exactly Chapter 6's liquidation math).

Method 2: Earnings Multiple: "What does it earn?"

Take yearly profit; multiply by an agreed number (the multiple) representing "how many years of this profit a buyer would pay for."

Small stable businesses commonly trade at 2×–5× yearly profit; the multiple rises with growth, systems, and independence from the founder, and falls with risk and owner-dependence. This is where the whole manual pays off in real money: a documented, systemized business (Volume 02) earns a higher multiple than an identical-profit business living in one person's head.

Method 3: Comparables: "What did similar businesses sell for?"

If a six-tailor workshop across town sold last year for ₦18,000,000, that's evidence. Comparables anchor negotiations in reality, where such data exists. In small-business markets it's often scarce; use it when you can find it, and adjust for differences (their machines were older; your order book is longer).

Method 4: Future-Based: "What will it plausibly earn?"

Project future profits; discount them because promised-later money is worth less than money now. This is how Nimbus Labs justifies a valuation far above its current tiny profit, and why such valuations are the most argument-prone. For most small businesses, treat it as a sanity check, not the headline. (When the future is truly unknowable, that's the convertible loan's cue: postpone the number.)

Putting them together

The negotiation settled at ₦20,000,000 pre-money, inside the range the methods bracket. A number outside the entire range is the warning sign.

Valuations become transactable through price per share:

Same 20% as Chapter 3: but now you can see the machinery: new shares are created for the investor (Mr A doesn't hand over his own), which is precisely why everyone else's percentage falls. That is dilution, mechanically.

Chapter 3, Section 7 showed one round of dilution. Here is the full two-round story in shares and naira:

Read Mr B's row twice. His percentage fell from 20% to 17%, but his shares never changed (200), and their value rose from ₦5,000,000 to ₦6,800,000, because Round B priced shares at ₦34,000 instead of his ₦25,000. Good dilution in one row: smaller fraction, bigger pizza, richer investor.

Bad dilution is the same table with a falling share price (a "down round"), everyone's slice shrinks in both percentage and value. The defense against bad dilution isn't a clause; it's a business that keeps earning its rising multiple.

Dilution's most important line isn't money, it's control. Two tripwires to watch across rounds:

Neither tripwire made a sound when crossed. That's the point of this section: model the cap table two rounds ahead before accepting round one, the Ownership Percentage Calculator does exactly this, and Chapter 13 explains what each threshold controls (and how non-voting classes and reserved matters change the picture entirely, Mr B's 17% carries no votes, so Mr A's voting power is still 100%... which is why share class design from Chapter 4 is the founder's real control instrument, not percentage alone).

Value your own business four ways, tonight:

1. Assets: list and price what it owns minus owes (be honest about resale, not purchase, prices).
2. Earnings: last 12 months' true profit × 2, × 3.5, × 5, write all three; then honestly grade which multiple your systems justify.
3. Comparables: ask around, any similar business sold or bought recently? Even rumor establishes a bracket.
4. Future: only if growth is provable, what could a skeptic accept?
5. Draw your bracket. Then model an investment at the bracket's low, middle, and high on the Ownership Percentage Calculator, two rounds deep, and note where your voting % crosses 75% and 50%.