How to Value Your Cleantech Startup Funding Round

We understand the instinct. You don't want to make the first offer because you fear you will get negotiated down, so "negotiable" seems safer than a wrong number.

Here's why it doesn't work: E8 doesn't lead rounds. Our members invest into terms that already exist. These terms can be set by a lead investor if you have one, or by you if you don't have a lead investor, which is common at pre-seed and early seed. Our screening team reads every application that comes in, but it isn't set up to negotiate on behalf of over 200 members. "Negotiable" leaves us nothing to evaluate and nothing to say yes to.

So if you don't already have a lead investor, the terms are yours to set. The good news: at the earliest stages, the market has converged on a standard structure, and setting terms mostly comes down to choosing two or three numbers. This article walks you through how to choose them.

Start with the Odds

Before any mechanics, it helps to see your round the way an investor sees it, and that starts with the odds.

Every entrepreneur who presents to us is confident their company will succeed. That confidence is necessary; nobody should start a company without it. But the numbers say most companies at this stage won't make it. In the largest study of angel-group returns to date, 52% of exits returned less than the capital invested. CB Insights followed more than 1,100 seed-funded companies for a decade: two out of three stalled without reaching an exit or follow-on funding. In a diversified angel portfolio, half the companies fail outright, a few return modest multiples, and one or two big wins carry everything else. In that same angel returns study, 7% of the exits produced 75% of all the returns.

That's the brutal arithmetic underneath every early-stage valuation conversation. An investor at your stage isn't pricing your plan as if it will succeed. They're pricing it knowing that most plans don't, and that the one or two winners in their portfolio have to pay for everyone else. A valuation that only makes sense if everything goes right leaves no room for that math, and experienced investors will pass on it no matter how much they like the company.

None of this is pessimism about you. It's how a portfolio survives long enough to keep backing entrepreneurs, and it's why the valuation you set should leave room for a big outcome to actually feel big to the people funding it.

Convertible Instruments: Agreeing to Decide Later

Since 2006, we've deployed over $75M into early-stage companies, and today 70-80% of the deals our members fund are on SAFEs or convertible notes. If you're at pre-seed or early seed, a SAFE is the default for a reason. Convertible notes are also often used - and E8 invests in companies raising on convertible notes - but are declining in popularity.

A SAFE (Simple Agreement for Future Equity) is a short, standard contract, published by Y Combinator, in which an investor puts money in now and receives equity later, when a priced round happens. They are often called “SAFE notes” but technically they are not notes (which are debt) - they are simply a contract that doesn't show up on the balance sheet. Its real purpose is to be able to raise money now at minimal legal expense and defer the valuation conversation. At your stage, nobody knows what the company is worth: not you, not us. A SAFE says so out loud. It lets everyone agree that when a lead investor eventually prices the company, that price will govern, and the early investors will get some compensation for having shown up when the risk was highest.

That compensation comes through two levers:

• The discount converts your SAFE holders' money into equity at a reduction from the priced-round price. 20% is the standard, and it's the one we see most. It's a plain trade: we came in one or two years before the priced-round investors, when there was more risk, so we pay less per share than they do.
• The valuation cap sets a ceiling on the conversion price. If the priced round values the company above the cap, early investors convert at the cap instead, so they share in the upside they helped create. Across the SAFEs our members have funded over the last few years, the median cap is $10.5M, and most sit between $5M and $15M. That squares with the broader market: Carta's pre-seed data shows median caps of $10M on post-money SAFEs for rounds under $1M, rising to $15M for rounds between $1M and $2.5M.

Caps come in two forms, too: a pre-money cap values the company before the money you're raising. A post-money cap includes the raise itself: the company plus all the money raised, in one number (i.e., the company's value before it raised money plus the money it raised equals how much it is now worth).

The post-money form is the current Y Combinator standard, the convention behind most published market data (including the Carta figures above), and the form we recommend. Its appeal is certainty: $100K on a $10M post-money cap converts to 1%, and both founder and investor can do that math on day one.

One thing to understand before you set the number: because a post-money cap includes the whole raise, every additional SAFE dollar you take comes out of your ownership, not your early investors'. A $10M post-money cap on a $1M raise values the underlying business at $9M; raise $2M against the same cap and you've valued it at $8M. Decide how much you're raising, set the cap with that number in mind, and close the round rather than letting it drift.

One more term you might see from us: an MFN (“Most Favored Nation”) clause. It says that if you later sell the same instrument to another investor on better terms (a lower cap, a deeper discount), our terms update to match. Especially if your terms are on the high end of range for valuations caps and / or the low end of discounts. Because we don't negotiate, MFN is what lets us accept your terms as offered: our members can say yes early without worrying that a later investor will cut a better deal behind them.

What About Convertible Notes?

Some of our members prefer convertible notes for the same underlying reason. A note works like a SAFE with three main differences:

• It accrues interest (6-8% is common)
• It has a maturity date (often called the term), and
• It is a debt instrument rather than a contract and will show up on your balance sheet until converted.

The interest is an investor sweetener if the priced round takes longer than expected: if the priced round takes years to arrive, the early investor is at least earning something in the meantime. Notes carry a little more administrative weight (they're debt on your balance sheet, legal costs are often higher than for SAFEs, and maturity dates may have to be extended if the round doesn't happen before the maturity date), but if your path to a priced round is long, offering a note can be a point in your favor. In addition, while SAFEs have standardized around the YC terms, convertible notes can have more variation (read: often higher legal costs and more time to negotiate with some investors). To address this, the Angel Capital Association has recently posted a Model Convertible Note.

Discount, Cap, or Both

The discount and the cap are answers to the same question: what does the early investor get when the priced round finally arrives? The discount covers one outcome. If the round prices the company below the cap (which happens for plenty of reasons: milestones took longer than planned, the market cooled, valuations in the sector reset), the discount rewards the investor for having come in early, converting their money at 20% below the new round's price. The cap covers the other outcome. If the company hits it out of the park and the round prices high, the cap sets the price the early money converts at, so the people who funded the company first share in the upside they helped create.

That's why we've seen both terms on one SAFE work best. A discount alone gives the investor no share of a breakout. A cap alone gives them nothing extra when the round prices modestly. Together, they assure the earliest money a fair return in either future, and neither costs you anything unless the company succeeds.

Time is the other lens worth applying. Some investors think of the discount as a clock: a 20% discount earned over one year is a solid return for the risk. Earned over two, it works out to 10% a year, still defensible. But if the priced round takes four years to arrive, it thins to 5% a year (and lower if you include compounding) on an investment that could still go to zero, and the investor starts to wonder whether they should have kept their money working elsewhere and simply joined your priced round later. The longer your path to a priced round, the more work the cap, or a convertible note's interest, has to do.

For companies building hardware in clean energy, storage, or industrial decarbonization, the choice between a SAFE and convertible note deserves honest thought. Software companies can often reach a priced round in 18 months. However, for a company that will likely need several years to achieve the milestones to justify a Series A, your terms should reflect that.

Picking the Right Valuation Cap

While you can just select a valuation cap within the range we have been funding over the past few years, as listed above, a small amount of research can yield a more refined result.

Early-stage venture investing relies heavily on comparables, sort of like real estate, which is then adjusted up or down to account for the positives and negatives or risks that present themselves for a given startup. First, compare your company to the larger market of startups getting funding in your sector, especially the fundraising rounds of companies that are most similar to yours. Start with the median valuation of those comparable rounds at a similar stage to yours, then adjust up or down based on the strength of your team and size of the opportunity. These two attributes make up more than half the weight angel groups often use to assess the valuation offered.

Where do you find comparables? Investors pay for databases like PitchBook; founders mostly don't, and that asymmetry is fixable for free. Carta publishes quarterly medians for caps and valuations by stage, round size, and sector, drawn from the startups on its platform. The Angel Capital Association's annual Angel Funders Report covers what angel groups like ours actually invested at. For climate specifically, Sightline Climate tracks funding rounds across the sector in a free weekly newsletter. And the best source costs nothing: founders a round ahead of you. Ask five of them what their terms were. Most will tell you, the same way they'll tell you which investors moved quickly. Investors compare notes constantly; founders should too.

Also consider going a step further and working backwards from what a successful exit might look like, perhaps drawing upon the comparables research you did above. Don't start from what you need or what you've spent. Start from what a successful exit in your sector plausibly looks like, based on actual acquisitions of actual companies, then work backwards. Typically, early investors get diluted 50-70% by later rounds, so for their stake to return the multiples the portfolio math requires, the exit needs to reach 8x your seed valuation or more. Price at $8M post-money, and you're implicitly promising a credible path to a $65M+ exit. Price at $20M, and that promise grows to $160M. Ask yourself which promise your traction supports.

When a Lead Prices Your Round

Some entrepreneurs come to us with priced equity rounds. The standard advice, ours included, is to let a lead investor set that price: a negotiated price from an experienced investor with committed money behind it answers the questions a self-set number leaves open. If you don't have a lead, the guidance above is your path. But while we're on the subject of deal terms, it's worth a few minutes on what comes next: how to prepare for the price conversation with a potential lead, and how to critically evaluate the terms one offers you.

The homework in understanding the right valuation cap applies here unchanged: know the recent rounds of companies like yours, know where your team and traction sit against them (the Scorecard Method many angel groups use puts more than half its weight on those two things), and know which evidence de-risks your story (e.g., revenue, pilots, signed LOIs, non-dilutive grants, a team that has done it before). Your lead prices rounds every year; you'll do this a handful of times in your life. The way to close that gap is not to negotiate harder, it's to read the same guidance written for angels and entrepreneurs your lead has read, and to know the comparables as well as they do. And leave your spreadsheet's out-years at home: at seed-stage discount rates, a dollar of projected year-ten profit is worth a few cents today, and a valuation argued from your own projections reads as inexperience.

When a term sheet arrives, a few checks tell you whether the price is in line with the market. Investors in a priced seed round typically end up owning 15-25% of the company, so an offer that has you selling 40% means you're raising too much or priced too low. Be equally wary of a price that flatters you: a valuation your traction can't support sets a bar your next round has to clear, and a down round will cost you more than a fair price today would have. And remember that price is one term among several. Understand the liquidation preference (1x non-participating is the standard) and who pays for the option pool before you compare offers, because a high headline valuation with unfriendly terms underneath can leave you worse off than a lower one.

When you apply to E8 with a priced round, name the lead and the terms. That's everything our screening committee needs to take the conversation forward.

Bottom Line

If you're pre-seed or seed without a lead, here's what we've seen work: a post-money SAFE with a 20% discount, a valuation cap you can defend with the reasoning above (across the SAFEs our members have funded, the median cap is $10.5M), and an MFN clause. That structure tells investors you understand the trade you're asking them to make, and it means the conversation with our screening committee can be about your company instead of your paperwork. You should also consider the message that is sent with your valuation cap. If a reasonable investor will see it as way too high, this is a signal that either you don't understand the dynamics of fundraising, or you will be a difficult CEO to work with, or both. And if it is too low, you signal desperation. Follow the Goldilocks rule when setting your valuation cap - not too high, not too low.

We read every application that comes in, and whether or not we invest, we're invested in your success. Naming your terms is one of the first acts of running the company like it's going somewhere. Name them.