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%.

Tags: valuation

31 Responses to “What is a Pre-money and Post-money Valuation?”

  1. Jim August 8, 2008 at 5:26 pm #

    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?

  2. Jim August 8, 2008 at 12:26 pm #

    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?

  3. Ryan Roberts August 14, 2008 at 1:45 am #

    Jim,

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

  4. Ryan Roberts August 13, 2008 at 8:45 pm #

    Jim,

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

  5. Jim August 14, 2008 at 2:16 pm #

    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.

  6. Jim August 14, 2008 at 9:16 am #

    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.

  7. Jon January 27, 2009 at 5:13 pm #

    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.

  8. Jon January 27, 2009 at 12:13 pm #

    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.

  9. Ryan Roberts February 5, 2009 at 12:37 am #

    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.

  10. Ryan Roberts February 4, 2009 at 7:37 pm #

    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.

  11. Janet August 31, 2009 at 4:46 pm #

    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?

    • RJ December 31, 2009 at 4:14 am #

      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?

  12. Janet August 31, 2009 at 11:46 am #

    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?

    • RJ December 30, 2009 at 11:14 pm #

      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?

  13. King Featheroff March 20, 2010 at 11:30 pm #

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

  14. King Featheroff March 20, 2010 at 6:30 pm #

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

  15. Andrew March 23, 2010 at 10:11 pm #

    good info Ryan. Thanks

    • carlos September 29, 2010 at 4:19 am #

      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

    • carlos September 29, 2010 at 4:19 am #

      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

  16. Andrew March 23, 2010 at 5:11 pm #

    good info Ryan. Thanks

  17. Simply_mich01 December 12, 2010 at 7:49 am #

    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?

  18. Simply_mich01 December 12, 2010 at 7:49 am #

    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?

  19. Mike January 7, 2011 at 9:41 am #

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

  20. Dr. Jerry February 10, 2011 at 2:28 pm #

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

  21. Tobie May 1, 2011 at 8:43 am #

    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.

  22. MKb June 25, 2011 at 9:51 am #

    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

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