When you’re building a startup, your most valuable asset is ownership. In the early days, you might not have much traction or revenue, but you own 100% of something that could one day be very valuable. That equity is your leverage. Eventually, someone like an investor, a strategic partner, or someone else will offer you something in exchange for a piece of it. The key question is: should you take the deal?

There’s no one-size-fits-all answer, but there is a useful rule of thumb that comes from first principles.

Let’s say your company is currently worth ₹100, and an investor offers you capital in exchange for 10% of the company. After the deal, you’ll own 90%. Now ask: how much more valuable must the company become so that your 90% is worth at least as much as your original 100%?

That leads to a simple equation:
0.9 × New Company Value = ₹100
New Company Value = ₹100 / 0.9 = ₹111.11

In other words, if you give away 10%, the company needs to grow by at least 11.1% for you to break even. More generally, if you're giving away n%, the company needs to grow by at least:

1 / (1 - n)

So if you give away 20%, the company must grow by 25%.
Give away 30%, it must grow by 43%.
Give away 50%, and it needs to double.

This isn’t just about company value, it's about your value. The point is that your remaining shares need to be worth more than the shares you originally had. If not, you're effectively moving bckward.

Now, to make the math simple, we framed this entirely in terms of raw monetary valuation. But real deals are rarely that clean. Investors sometimes bring more than money and they might open up customer pipelines, introduce you to critical hires, or bring credibility that helps you raise the next round. These intangibles don’t show up in the valuation, but they doincrease your startup’s potential.

So if you're comfortable with the basic calculation, you can build on it. Start by estimating the monetary boost they provide, then mentally add in the strategic value. For example, maybe an investor offering capital at a 20% dilution also brings in early customers and follow-on funding opportunities. If you think that increases your likelihood of success by 40% overall, then even a deal that looks “expensive” on paper might still be worth it. Just be honest with yourself about what’s real and what’s speculative.

That said, there’s an important disclaimer here. This rule is a guide, not a law. Sometimes you’re not negotiating from strength. If your runway is short, or you’re stuck without a bridge round, or the market turns on you, you might have totake a deal that doesn’t meet this threshold. That’s okay. In those cases, your priority is to keep the company aliv and not to optimize for fairness. Survival first, optimization second.

So use this rule of thumb when you're in a position to negotiate. It helps you define what a “fair” valuation looks like, gives you a baseline for what growth justifies dilution, and tells you how far you’re stretching when you bend under pressure. Knowing this framework won’t make deals easier, but it will make your decisions smarter.

This idea originally comes from a fantastic essay by Paul Graham, cofounder of Y Combinator. What you’re reading here is a simplified and intuitive walkthrough of the same logic. If you found this helpful, the original is well worth reading: https://www.ycombinator.com/library/8u-the-equity-equation?carousel=Essays by Paul Graham.