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What is a Pre-money and Post-money Valuation?

By Ryan Roberts

When your startup company raises capital, valuation is a key question that must be tackled Rey Maualuga style. (If you are unfamiliar with “Rey Maualuga style,” click here for a Youtube example.) The two main valuation concepts in a venture capital financing are pre-money and post-money valuation.

Pre-money Valuation

“Pre-money valuation” refers to the valuation of your startup company just before it takes on a venture capital investment. The algebra looks like this:

Pre-money Valuation = Price of Startup’s Shares * Number of Startup’s Shares before Financing

Post-money Valuation

“Post-money valuation” refers to the valuation of your startup company immediately after the venture capital investment. The algebra looks like this:

Post-money Valuation = Pre-Money Valuation + Investment

Post-money valuation reflects that the immediate or short term effect an investment will have on your company is simply the amount of cash invested.

An Example of Pre-money & Post-money Valuation

Pre-money

Let’s say your startup has issued 5 million shares before the venture financing and the current share price is $1 per share (putting aside how we arrive at $1/share). Your startup company’s pre-money valuation is $5,000,000 ($1 share price * 5,000,000 issued startup company shares before the financing).

Post-money

Now imagine Google’s new venture capital fund proposes an investment of $3,000,000. If your startup company takes the venture capital funding, it’s post-money valuation will be $8,000,000 ($5,000,000 pre-money valuation + $3,000,000 Investment from Google).

How much of my startup company does Google now own?

The calculation of how much the venture capital fund owns after a financing is equal to the amount of the investment divided by the post-money valuation. In equation form it looks like this:

Investment/Post-money Valuation

or

Investment/(Pre-money Valuation+Investment)

In our example, Google made a $3,000,000 investment at a $5,000,000 pre-money valuation. 3,000,000/(5,000,000+3,000,000)= 37.5%. Google owns 37.5% of your startup company (in preferred stock) while all the other shareholders of your startup company own the remaining 62.5%.

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Full post as published by The Startup Lawyer on July 31, 2008 (boomark / email).