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**.

In a venture capital transaction, the venture capital firm invests cash in the startup company in exchange for newly-issued (preferred) stock. The startup company’s value immediately before the funding is called “**pre-money valuation**” while the startup company’s value immediately after the transaction is called “post-money valuation.” (Technically, pre-money and post-money are more about price than a startup company’s valuation.)

**Pre-money Valuation and Post-money Valuation Equations**

* (1) Pre-money Valuation = Post-money valuation – Venture Capital Investment*

*(2) Post-money Valuation = Venture Capital Investment/Venture Capital Ownership Percentage*

You can determine share price by the following equation:

*(3) Share Price = Pre-money Valuation/Number of ***Pre-money shares**.

You can determine how many shares to issue the venture capital firm by this equation:

*(4) New Shares Issued = Venture Capital Investment/Share Price*

**Pre-money Valuation and Post-money Valuation Examples**

*Example 1*

Let’s say Google’s new venture **fund** comes to you and offers to invest $3MM into your startup for 30% of the company. Plugging the numbers into equation (2), we get:

*Post-money valuation = $3MM/.30 = $10MM*

Thus, to calculate pre-money valuation, we use equation (1) as we now know the post-money valuation and the investment amount:

*Pre-money valuation = $10MM – $3MM = $7MM*

*Example 2*

Now let’s say a venture capital firm offers your startup company a $4MM investment at a $6MM pre-money. To determine how much your startup would give up in exchange for the $4MM, we use equation (1) and get:

*$6MM = Post-money valuation – $4MM, and solving for Post-money valuation (Post-money = Pre-money + Investment) gives us $10MM *

Next, we use equation (2) to find the Venture Capital firm’s percentage:

$10MM = $4MM/Venture Capital Firm Ownership Percentage (VCFOP), solving for VCFOP (VCFOP = $4MM/$10MM) we get 40%.