Raising too much money at a high valuation puts a "bogey on your back." It forces a "shoot the moon" strategy, which can decrease capital efficiency, make future fundraising harder, and limit potential exit opportunities by making the company too expensive for acquirers.

The first question in any fundraising or M&A discussion is always, 'What was your last round price?' An inflated number creates psychological friction and can halt negotiations before they begin. Founders should optimize for a valuation that allows for a clear up-round, not just the highest price today.

Accepting too high a valuation can be a fatal error. The first question in any subsequent fundraising or M&A discussion will be about the prior round's price. An unjustifiably high number immediately destroys the psychology of the new deal, making it nearly impossible to raise more capital or sell the company, regardless of progress.

Valuations don't jump dramatically; they 'sneak up on you.' An investor might balk at a $45M cap when they expected $40M. But the fear of missing a potential unicorn is stronger than the desire for a slightly better price, causing a gradual, batch-over-batch inflation of valuation norms.

A stock price disconnected from fundamentals can be a powerful tool. As seen with Meta in 2022, a low stock price hinders recruitment. Conversely, a high stock price acts as a valuable currency for equity compensation, allowing companies to attract and retain elite employees, even if investors are skeptical of the valuation.

Dan Sundheim argues successful private companies should avoid going public. Public market volatility means stock prices, and thus employee compensation, are driven by sentiment, not fundamental value creation. Being dramatically overvalued can be as harmful as being undervalued, as it misaligns incentives for future hires.

Chasing high, unrealized valuations is dangerous. It makes common stock prohibitively expensive, undermining the potential for life-changing wealth for employees—a key recruiting tool. It also narrows a company's strategic options, locking it into a high-stakes path where anything less than exceeding the last valuation is seen as failure.

While a high IPO valuation seems like a victory, it can be destructive internally. When the stock inevitably corrects, employees experience the drop as a personal loss due to psychological loss aversion, leading to distraction and depression. CEOs should nudge markets toward sane, sustainable valuations.

Traditional valuation doesn't apply to early-stage startups. A VC investment is functionally an out-of-the-money call option. VCs pay a premium for a small percentage, betting that the company's future value will grow so massively that their option expires 'in the money.' This model explains high valuations for pre-revenue companies with huge potential.