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pre-money and post-money valuation

Also called: pre-money valuation, post-money valuation, pre-money, post-money

The value an investor puts on a company before its new money comes in (pre-money) and right after (post-money = pre-money + the new investment). The investor's share is the investment divided by the post-money valuation.

In an equity round, the investor's offer implies a price for the whole company. The post-money valuation is that price right after the money arrives: post-money = investment ÷ the share the investor receives. The pre-money valuation is the same company before the new money: pre-money = post-money − investment. It is what the investor thinks the business is worth today.

The new shares dilute every existing owner in proportion: each keeps (1 − the investor's share) of their stake. Founders with 80% who sell 12.5% of the company to a new investor end up with 80% × 0.875 = 70%; early investors with 20% end up with 17.5%. Dilution isn't a loss in itself, as long as the money raises the value of the remaining slice by more than the slice shrinks.

When comparing offers, compare the pre-money valuation and the terms that come with it (board seats, preferences, conditions), not only the amount. The same 6 million for 10% or for 15% are very different prices for the founders' company.

Example

An investor offers Klasna 6,000,000 UAH for 12.5%.

  • Post-money: 6,000,000 ÷ 0.125 = 48,000,000 UAH.
  • Pre-money: 48,000,000 − 6,000,000 = 42,000,000 UAH.
  • Founders: 80% × 0.875 = 70%; early investors: 20% × 0.875 = 17.5%; new investor 12.5%. Total 100%.

In a year with 5,000,000 of operating profit, the 10 points the founders give up are worth 500,000 of that year's profit, and the same share of any future sale.

Common mistakes

  • Mixing up pre and post. "6 million at 48" and "6 million at 48 pre" are different deals: 12.5% vs about 11.1%.
  • Comparing amounts, not prices. The pre-money valuation is the price; the amount is only the size.
  • Forgetting earlier owners. Every existing shareholder is diluted, not only the founders.
  • Ignoring the terms. Preferences, board seats and conditions can matter as much as the valuation.

Learn it in the course