Valuation Floor

Negotiation Boundary

Parties define these numbers early in the term sheet to focus the due diligence effort on the remaining delta. When a valuation floor is in place, the investor risks losing the trade if the audit reveals details that would normally push the value lower. It provides the founders with a walk-away point.

This certainty speeds up the closing of smaller rounds.

Mechanism Function

Pricing formulas stop adjusting once they hit the limit defined in the legal document. If the calculated market value falls under the valuation floor, the fixed number takes priority in the share issuance math. This consistency allows financial planners to model the maximum possible dilution for the round.

The floor typically reflects the replacement cost of the technology or the liquid asset value.

Upside Protection

Founders accept higher interest rates or other governance concessions in exchange for the safety of a price limit. The valuation floor prevents the sudden collapse of ownership control during broad market downturns. It creates an floor for the valuation of employee options as well.

Investors view it as a check on deep-discount entry points.