Suppose my company is worth $5 right now. If you give my company $1, it is now worth $6. ($5 assets before + $1 cash). $1 / $6 = 1/6th of the company; you have

Suppose my company is worth $5 right now. If you give my company $1, it is now worth $6. ($5 assets before + $1 cash). $1 / $6 = 1/6th of the company; you have 1/6th and I have 5/6ths. If you pay $1 for 20% of the stock, that implies a $4 pre-money valuation--after adding the $1, the company is worth $5, so your share is worth 20% and mine is 80%.