Who's Holding the Bag?

Last week I wrote about the high-valuation trap. This is about who actually lives with it.

Most founders think about valuation as a negotiation between two parties. Them and the lead investor. The number gets set, the round closes, the announcement goes out. What’s less obvious is what happens after.

The risk doesn’t stay between those two parties. It distributes.

And it distributes unevenly… toward the people with the least information and the least leverage at the moment they took it on.

The Mechanics of How It Spreads

A VC firm operates on fund math. They raise capital from LPs, deploy it across a portfolio, and need markups to demonstrate progress when raising the next fund. An aggressive valuation on your round isn’t just about belief in your company. It’s also useful to them structurally. A markup is a markup, whether it reflects reality or not. If the valuation compresses later, the fund absorbs it across a portfolio of bets. That’s what portfolios are for.

The founder has one cap table. But at least the founder was in the room. They saw the term sheet. They understood the trade.

The engineer who joined six months after the round didn’t see any of that. They got an offer letter with a strike price inherited from a valuation set by two parties optimizing for different things. They took a pay cut to be there. They believed the story. The cap table math wasn’t part of the conversation.

That’s the information gap no one talks about in pitch meetings.

Who Actually Bears the Cost

When a valuation overshoots and reality catches up, the correction isn’t evenly distributed either.

The VC marks down a position. Unpleasant, but the fund math still works if the rest of the portfolio holds. They’ve hedged in ways your team hasn’t.

The founder takes a reputational hit and a harder fundraise. Painful, but they at least understood the risk profile when they signed.

The team members who joined in the markup window? They’re holding options that may never be in the money. The strike price reflects a moment of peak optimism that the business hasn’t grown into yet. They can’t hedge. They can’t diversify. They made a career decision based on equity that’s now functionally underwater.

They’re the ones paying for a negotiation they weren’t part of.

What This Means for Founders Who Care

Valuation discipline isn’t just financial hygiene. It’s a form of loyalty to the people who bet on you.

When you optimize for the highest number, you’re not just setting your own future constraints. You’re setting the strike prices for everyone who joins after the round. You’re determining whether the VP of Engineering who turns down a safer offer can actually build wealth here. Whether the early employees who grind through the hard middle years end up with something real.

A founder who genuinely cares about retention doesn’t outsource that decision to whoever offers the most aggressive term sheet. The number that feels like a win in the announcement becomes the anchor everyone else is measured against.

The VC who pushed for the higher number will move on. The fund has twenty other bets. The team member who joined because they believed in you… they don’t have that option.

Valuation is a leadership decision. The people in the room when it gets made aren’t the only ones who live with it.