What is Pre-money vs Post-money Valuation?

The difference between a Pre-money vs. post-money valuation is that they are the values of a company before and after an investment. They are the two words most commonly used when talking to venture capitalists.

How to Figure Out Pre-money and Post-money Valuation

Pre-money valuation is the value that is placed on a company before the investment. The number is most often determined after an investor makes an offer. It is one of the most important factors for a venture capitalist when he or she is considering investing.

Pre-money = Post-money - New Investment

Post-money valuation is the worth of the company after the investment has been made. The investor offer that the makes determines this value.

Post-money = Pre-money + New Investment

If the pre-money value unknown, you can use the following equation:

Post-money = Venture Capital Investment / VC Percentage of Ownership

  • Example :
    • An investor offers you $5 million at a $15 million post-money value.
    • Pre-money = $15 million - $5 million. The pre-money value of the company is $10 million.
    • We already know the post-money value is $15. Now we can figure out the percentage of ownership you will be giving away.
    • $5 million divided by $15 million equals 33 percent.

Why Are Pre-money and Post-money Valuations Important?

Pre-money and post money valuations are two important numbers to investors. It allows them to calculate the value of their investment and to consider how much return they will get in the future.

Pre-money valuations don't just give the investor and business owner the current value of the business. They also give the current value of each share that has been issued. This is important because it will decide how many shares the investor receives.

  • Example:
    • If the pre-money valuation is $10 million dollars, and before investment, the number of shares issued is 1 million, you calculate the share price by dividing the pre-money value by the number of issued shares. The current share price is then $10 per share.
    • To calculate how many new shares to issue, you will then divide the investment amount by the current share price. In this example, that is $5 million / $10. For that investment, you will issue 500,000 shares.

Post-money valuations are important for future investment. If you are looking for money from venture capitalists in the future, one of the first things they will look for is that your current pre-money valuation is higher than your last post-money valuation. It simply means you have grown since your last investment.

If the current pre-money value is the same as the last post money value, this is called a flat round. If it is lower, it is called a down round. Having an up round is best. It means your company is "on track" and continuing to grow.

Frequently Asked Questions

  • What is a liquidation preference?

Liquidation preference is given to investors as part of their preferred stock. Venture capital investors are always given preferred stock (rather than common stock) as their equity. The liquidation preference means the preferred stockholders has priority for payout when the company either goes bankrupt or is bought out. Once the shareholders receive their cut, the next people to receive money from the "liquidation" of the company are the preferred stockholders.

There are three types of liquidation preference:

  1. Straight or Non-participating : This is the best option for the company. When liquidation occurs, the preferred stockholders can either receive their initial investment back plus accrued dividends, or they can convert their shares into common stock and be treated as common stockholders. Common stockholders share in the remaining money.
  2. Participating : The is the best option for the investor. As with the Straight, the investor will receive back his or her investment as well as accrued dividends. Plus, they would be treated like common stockholders, therefore, being paid twice.
  3. Capped or Partially Participating : This is the in-between option. It is everything included in the participating preference, except that the amount of money they receive is capped. Once they have received the capped amount of money, they cannot have anymore.

These options should be discussed and decided upon before the investment is made. Obviously, the Straight liquidation preference is best for you and your business, so it should be pushed for during negotiations.

  • How do you calculate your value at the startup stage?

The first thing you should do is calculate the minimum amount of money you will need to show a significant amount of growth. Then, you need to determine how much equity you are willing to give away in exchange for that amount. As a startup, you likely won't want to give away more than 5-10 percent of your equity. You then simply divide the amount you want by the percentage you give away. For example, you need $100,000 and you are willing to give up 10 percent of your company. Therefore, the value of your company is $1 million.

  • What is a convertible note?

A convertible note is when a company gives equity in exchange for an investment rather than being loaned the money and simply paying it back with interest.

  • What is a round size?

The round size is the amount of money you receive from a round of investment. It is important when going into an investment round to think about more than just the round size. Consider what these investors bring to the table besides money. Also, consider the terms that the money is taken on (how much of the company are you giving up?).

  • What is an option pool?

An option pool is the amount of stock set aside for future employees and investors. This can also be thought of as the percentage of your company you are willing to give away in the future.

If you need help with pre-money versus post-money valuations, you can post your question or concern on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.