When a **startup** raises capital, **valuation** is main economic term that must be tackled. The two main ways valuation is expressed in **venture capital** financings are what’s known as the “**pre-money valuation**” and the “**post-money valuation**”.

The startup’s valuation immediately *before* the venture capital investment is called “pre-money valuation” while the startup’s valuation immediately after the **venture capital financing** is closed is called the “post-money valuation.”

Equation (1) below explains how to calculate the pre-money valuation. But sometimes a startup is not given the post-money valuation figure from an investor and therefore can’t make the easy pre-money valuation determination via Equation (1) below. Rather, the investor will tell the startup (a) how much they are investing and (b) what percentage they want — this is where Equation (2) below comes into play. Then after solving Equation (2) first, then the startup **founders** can solve Equation 1 and determine the pre-money valuation being offered.

Let’s walk through the formulas first:

**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 Fund Ownership Percentage
*

Note that to you can determine share price by the following equation:

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

(Pre-money shares is the number of shares outstanding immediately prior to the new venture capital investment.)

Next, you can also determine how many shares to issue the venture capital firm by this equation:

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

Now let’s walk through some examples:

**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) above, 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%.

**Conclusion**

The two main concepts of valuation for startups are related, but they are often mistakenly interchanged. If you bookmark this page, you can be sure to know what your pre-money and post-money valuation is when a prospective investor gives you the variables for the above equations.

So, if an angel wants 5% of my company, assuming I had one.

And that angel is willing to invest $15,000 for that 5%.

Working backwards to find post-money value…

Given, post money = pre-money + investment.

Then,

Post-money = $300,000

Pre-Money = $285,000

Investment = $15,000

So, angel's 15,000 investment just bought him 5% of the company (15 / 300).

Then Pre-money value = price of shares * value of shares before financing.

For 500,000 shares, $285,000 = $0.57 * 500,000, or

For 1,000,000 shares, $285,000 = $0.28 * 1,000,000

Does that look right?

So, by an angel saying they are willing to invest $15k for 5% into my imaginary company, that angel has just defined a post-money value (and pre-value) for my firm.

By extension, can my wife invest $500 in my company for a post-money 0.5% interest, that would cause my post-money value to = $100,000 ( = 500 / 0.5)? I would own 99.5%, or $99,500 (pre-money) with no cash invested, and she would own 0.5% with $500 cash invested?

So, if an angel wants 5% of my company, assuming I had one.

And that angel is willing to invest $15,000 for that 5%.

Working backwards to find post-money value…

Given, post money = pre-money + investment.

Then,

Post-money = $300,000

Pre-Money = $285,000

Investment = $15,000

So, angel's 15,000 investment just bought him 5% of the company (15 / 300).

Then Pre-money value = price of shares * value of shares before financing.

For 500,000 shares, $285,000 = $0.57 * 500,000, or

For 1,000,000 shares, $285,000 = $0.28 * 1,000,000

Does that look right?

So, by an angel saying they are willing to invest $15k for 5% into my imaginary company, that angel has just defined a post-money value (and pre-value) for my firm.

By extension, can my wife invest $500 in my company for a post-money 0.5% interest, that would cause my post-money value to = $100,000 ( = 500 / 0.5)? I would own 99.5%, or $99,500 (pre-money) with no cash invested, and she would own 0.5% with $500 cash invested?

Jim,

I re-wrote the post to (hopefully) make it more clear. I think your calculations look good.

Jim,

I re-wrote the post to (hopefully) make it more clear. I think your calculations look good.

Thanks. I think this works, in some regards, if the stock is issued after initial seed funding, or as a result of it. For example:

Pre-seed angels invest $15k for 15% of the company, which would value it at $100k (= 15k/0.15)

Then issue 1,000,000 original shares at a value of $0.01 per share so that now my angel owns 150,000 shares (and 15%) and I own 850,000 (85%).

THEN, if we went to YC (Y Combinator) for add'l funding, say $20k, it would look like:

Prevalue = $100,000

YC investment = $20,000

Post value = 100,000 + 20,000 = 120,000.

YC ownership 20/120 = 17% current ownership.

Pre-seed investm't = 15/120 = 12.5%

My ownership interest = 85/120 = 71%

For the 20k investment by YC, 200,000 new shares would have to be issued, which then dilutes everyone's ownership.

I think that's right.

Thanks. I think this works, in some regards, if the stock is issued after initial seed funding, or as a result of it. For example:

Pre-seed angels invest $15k for 15% of the company, which would value it at $100k (= 15k/0.15)

Then issue 1,000,000 original shares at a value of $0.01 per share so that now my angel owns 150,000 shares (and 15%) and I own 850,000 (85%).

THEN, if we went to YC (Y Combinator) for add'l funding, say $20k, it would look like:

Prevalue = $100,000

YC investment = $20,000

Post value = 100,000 + 20,000 = 120,000.

YC ownership 20/120 = 17% current ownership.

Pre-seed investm't = 15/120 = 12.5%

My ownership interest = 85/120 = 71%

For the 20k investment by YC, 200,000 new shares would have to be issued, which then dilutes everyone's ownership.

I think that's right.

When we issue the subscription agreement, is the cost per unit/share pre-money or post-money.

For instance, ours reads "Subject to the terms and conditions hereof and the provisions of the Partnership Agreement, I hereby irrevocably agree to purchase the number of Units set forth on page 7 of this Subscription Agreement (“Agreement”) for $1,000 per Unit."

For years I have been calculating this as pre-money but then realized I had no idea which hat I pulled that assumption.

When we issue the subscription agreement, is the cost per unit/share pre-money or post-money.

For instance, ours reads "Subject to the terms and conditions hereof and the provisions of the Partnership Agreement, I hereby irrevocably agree to purchase the number of Units set forth on page 7 of this Subscription Agreement (“Agreement”) for $1,000 per Unit."

For years I have been calculating this as pre-money but then realized I had no idea which hat I pulled that assumption.

Capital is capital. The investment itself isn't issued as pre or post, but you can subtract the investment to determine the pre and post valuation.

Capital is capital. The investment itself isn't issued as pre or post, but you can subtract the investment to determine the pre and post valuation.

Ryan,

I'm still struggling with this concept a bit and need some help. I am in the process of starting a company and I seek investors. I currently guage my start-up expenses (including working capital) to be $250-300K. I seek to raise this money through investors. How would I value the company and what % can I offer investors?

Janet,

Value the company at what you think it's worth, just remember that doesn't mean the investors will agree. Simple example, if you need $300k and your willing to give say 30% equity for that investment your companies post-money valuation would be $1MM. Pre-money $700k.

If you want to give 40% use $300k/.4 which equals $750k post-money valuation.

Make sense?

Makes a lot of sense. And you just helped me make a decision with regards to my pre-money valuation. Thanks.

Ryan,

I'm still struggling with this concept a bit and need some help. I am in the process of starting a company and I seek investors. I currently guage my start-up expenses (including working capital) to be $250-300K. I seek to raise this money through investors. How would I value the company and what % can I offer investors?

Janet,

Value the company at what you think it's worth, just remember that doesn't mean the investors will agree. Simple example, if you need $300k and your willing to give say 30% equity for that investment your companies post-money valuation would be $1MM. Pre-money $700k.

If you want to give 40% use $300k/.4 which equals $750k post-money valuation.

Make sense?

You have got the position across much better than I ever might, thanks!

You have got the position across much better than I ever might, thanks!

good info Ryan. Thanks

Hi,

But what about if you already have some income, you have not reached break-even yet and you want to calculate pre-money valuation. Imagine the company this year is going to loose $50.000 with an income of $350.000. You have already invest(unique investor) in the company $40.000 and you need $300.000. You expect break-even next year and with the posivite FCF year1=10.000 year 2=30.000 and year 3=50.000.

How would you make the evaluation?

Thanks

Hi,

But what about if you already have some income, you have not reached break-even yet and you want to calculate pre-money valuation. Imagine the company this year is going to loose $50.000 with an income of $350.000. You have already invest(unique investor) in the company $40.000 and you need $300.000. You expect break-even next year and with the posivite FCF year1=10.000 year 2=30.000 and year 3=50.000.

How would you make the evaluation?

Thanks

good info Ryan. Thanks

for the Prevalue, is that just a projection or is it a REAL value? Assuming this is a start up, the company does NOT have any money and is looking for investors to fund the company 100%.

Can I say my company has a pre value of $100,000 even though I have not invested any on it?

for the Prevalue, is that just a projection or is it a REAL value? Assuming this is a start up, the company does NOT have any money and is looking for investors to fund the company 100%.

Can I say my company has a pre value of $100,000 even though I have not invested any on it?

[…] is the value of your company before the addition of the funds you are seeking. For example, company number 4 is seeking $500,000 […]

[…] is the value of your company before the addition of the funds you are seeking. For example, company number 4 is seeking […]

Has anyone created a simple spreadsheet that can do this easily?

[…] is the value of your company before the addition of the funds you are seeking. For example, company number 4 is seeking […]

[…] low…really low. If an incubator offers your startup $25,000 in exchange for 6% equity, the pre-money valuation is a whopping […]

Ryan,

I am a little fuzzy about how to figure the number of shares available and what that equates to as ownership percentage.

Hi Ryan

Im in need of my second round funding for my Start Up in South Africa, i have the same investors willing to invest in round 2.

I need some assistance in the following :

My total capital need at start up was R 13 000 000 / $ 1.3 Million dollars

However, the Equity deal was structured at 50% investors / 50% me for R 3000 000 / $ 300 000 dollars first round.

Should i raise the next round of R 1000 000 / $ 1000 000 what Equity percentage will this entitle the investors?

We are now going to market, proto type has been built, so we need the funding to hire resources, fund operations and marketing.

Your help will be much appreciated.

We are a startup company & had invested Rs 5 million ,We are looking for 20 million rupees as P.E,What will be pre-valuation & post valuation of our company

[…] he co-founded, SiteAdvisor, raised its first round of $2.6M at a $2.5M pre-money valuation (this link provides brief introduction to pre & post valuation money and Venture Capital percentage […]

Hi There,

I would appreciate if you can assist me in this matter.

We are 4 shareholders with this distribution of equity:

Shareholder A: 50%

Shareholder B: 30%

Shareholder C: 15%

Shareholder D: 5%

I asked all shareholders collectively to invest additional capital of $100K, with a current valuation of $500K. All Shareholders agreed to invest, except Shareholder B (has 30% equity).

If all other Shareholders (A, C and D) invest additional $100K collectively;

A) Based on current shareholding, how much would their contribution be?

B) How much dilution will Shareholder B have (since he did not put any capital)

C) What would be the new equity shareholding for each shareholder?

I would appreciate your assistance in this matter.

Regards,

Andrew

[…] a good article on valuation explanations and […]