What is a Pre-money and Post-money Valuation?
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%.
About the Author
Ryan Roberts is a startup lawyer and represents technology companies through all phases of the startup process, including incorporation, seed & venture financings, and exit transactions. Click here to learn more about his practice.
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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.
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.
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?
You have got the position across much better than I ever might, thanks!
good info Ryan. Thanks