Startup Lawyer | What is a Pre-money and Post-money Valuation?
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What is a Pre-money and Post-money Valuation?

Posted 31 Jul 2008

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 Comments
  • Jim
    Posted at 17:26h, 08 August Reply

    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
    Posted at 12:26h, 08 August Reply

    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?

  • Ryan Roberts
    Posted at 01:45h, 14 August Reply

    Jim,

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

  • Ryan Roberts
    Posted at 20:45h, 13 August Reply

    Jim,

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

  • Jim
    Posted at 14:16h, 14 August Reply

    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.

  • Jim
    Posted at 09:16h, 14 August Reply

    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.

  • Jon
    Posted at 17:13h, 27 January Reply

    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.

  • Jon
    Posted at 12:13h, 27 January Reply

    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.

  • Ryan Roberts
    Posted at 00:37h, 05 February Reply

    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 Roberts
    Posted at 19:37h, 04 February Reply

    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.

  • Janet
    Posted at 16:46h, 31 August Reply

    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
      Posted at 04:14h, 31 December Reply

      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?

  • Janet
    Posted at 11:46h, 31 August Reply

    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
      Posted at 23:14h, 30 December Reply

      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?

  • King Featheroff
    Posted at 23:30h, 20 March Reply

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

  • King Featheroff
    Posted at 18:30h, 20 March Reply

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

  • Andrew
    Posted at 22:11h, 23 March Reply

    good info Ryan. Thanks

    • carlos
      Posted at 04:19h, 29 September Reply

      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
      Posted at 04:19h, 29 September Reply

      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

  • Andrew
    Posted at 17:11h, 23 March Reply

    good info Ryan. Thanks

  • Simply_mich01
    Posted at 07:49h, 12 December Reply

    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?

  • Simply_mich01
    Posted at 07:49h, 12 December Reply

    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?

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  • Mike
    Posted at 09:41h, 07 January Reply

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

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  • Dr. Jerry
    Posted at 14:28h, 10 February Reply

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

  • Tobie
    Posted at 08:43h, 01 May Reply

    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.

  • MKb
    Posted at 09:51h, 25 June Reply

    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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