Pre-money vs. Post-money

Pre-money vs. Post-money

Any serious equity investor – and savvy entrepreneur – will focus on the pre-money valuation of a company. Both pre-money and post-money are simply valuation measures. The difference between them is simply a matter of timing of valuation. Pre-money valuation refers to a company’s value before it receives outside financing or the latest round of financing, while post-money refers to the company’s value after it gets outside funds or its latest capital injection. It is important to know which is being referred to as they are critical concepts in valuation.


The Basic Maths:

Pre-money Valuation + Invested Capital = Post-money Valuation

Price per Share = Pre-money Valuation/Pre-money Shares

Let me explain the difference by using a couple of examples:

In a company with a pre-money valuation of $5 million, a $5 million investment would by a 50% ownership stake and would give a $10 million post money valuation.

Suppose that an Angel investor is looking to invest in an early stage venture with high growth potential. The entrepreneur and the Angel investor both agree that the company is worth $1 million and the investor will put in $250,000.

The ownership percentages will depend on whether this is a $1 million pre-money or post-money valuation. If the $1 million valuation is pre-money, the company is valued at $1 million before the investment and after investment will be valued at $1.25 million. If the $1 million valuation takes into consideration the $250,000 investment, it is referred to as post-money.

Pre-money Valuation

Post-money Valuation

Value

Percent

Value

Percent

Entrepreneur

$1,000,000

80%

Entrepreneur

$750,000

75%

Investor

$250,000

20%

Investor

$250,000

25%

Total

$1,250,000

100%

Total

$1,000,000

100%

As you can see, the valuation method used can affect the ownership percentages in a very sizable way. This is due to the amount of value being placed on the company before investment. If a company is valued at $1 million, it is worth more if the valuation is pre-money compared to post-money because the pre-money valuation does not include the $250,000 invested. While this ends up affecting the entrepreneur’s ownership by a small percentage of 5%, it can represent millions of dollars if the company goes to an IPO at some future date!

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