My startup is valued at 10 million. Why am I still broke?

When an investor buys part of your company, both sides agree a price for the whole company. That price is the valuation. It sets how big a slice the investor gets for their money.

It is a price on paper, agreed for one deal, on one day. Nobody hands you that amount. It is closer to a price tag that a buyer accepted for a small piece than to a balance in a bank account.

• Pre-money valuation: what the company is valued at just before the new money comes in.
• Post-money valuation: the pre-money value plus the new money. It is the value just after the deal.

The investor's share is their money divided by the post-money valuation. So the same deal can sound very different depending on which number someone quotes. Always ask which one they mean.

Here is an illustrative example with round, made-up numbers in your own currency. They are not from any real company or benchmark.

Say you own all of your company. An investor puts in 2 million at a pre-money valuation of 8 million. The post-money valuation is 10 million, so the investor now owns 2 million out of 10 million, which is 20 percent.

Now look at what changed for you:

• The company's bank account gained 2 million. That money belongs to the company, not to you.
• You own 80 percent of a company valued at 10 million. On paper that is 8 million.
• Your personal bank account gained nothing. You get paid only if the company pays you a salary.

So "valued at 10 million" and "broke" can both be true at the same time. The investor did not buy your shares. They bought new shares from the company, and the money went to the company.

Shares in a young private company are hard to sell. There is no stock market for them, and your investment agreements often limit who you can sell to and when. Buyers are rare, and investors usually dislike founders cashing out early, because they want you focused on growth.

Founders usually turn shares into money through a sale of the whole company or a stock market listing. Sometimes a later round, a group of investors putting money in at the same time on the same terms, buys a few founder shares. In our reading, many companies never reach any of those.

Dilution means your share of the company gets smaller each time the company issues new shares. It happens in every round and often when an option pool is created, a set of shares kept aside to reward future employees.

Continuing the made-up example: if the next round sells another 20 percent of the company, you keep 80 percent of your 80 percent. That leaves you with 64 percent. A higher valuation can still make your slice worth more, but the slice itself is smaller.

Not necessarily. Many investment deals include a liquidation preference, a term that lets investors get their money back before founders receive anything in a sale. If the company sells for less than hoped, founders can receive much less than their percentage suggests. Read what term sheet phrases mean to see how these terms change your outcome.

From the company's money, as a salary the company can afford. Investors often expect founders to take a modest salary, enough to live on, so the money goes into building the business. Agree the number openly with your investors rather than guessing what is allowed.

The strongest case against worrying about any of this: if the company grows large, a small share of a very valuable company can still be life-changing. The missing fact is whether yours will. In our reading, most young companies never reach a sale or listing, so plan your personal finances as if the paper value stays on paper.

If you have not raised yet and this trade-off feels wrong for you, read should you raise venture capital before you start.

Write three numbers on one page: the money the company actually holds, your ownership percentage today, and your percentage after one more round that sells 20 percent. Then work out the monthly salary you need to live on, and check whether the company can pay it for the next 12 months.