What’s the difference between pre-money and post-money? The timing of the valuation is the answer to this question. Both pre-money and post-money are valuation measures of companies and are critical in determining how much a company’s worth, especially with start-ups and early-stage companies.
Pre-money valuation is the value of a company excluding external funding or the latest round of funding / investment. Pre-money is best described as how much a business might be worth before it begins to receive any funding. This valuation gives investors an idea of the current value of the business, but it also calculates the value of each issued share.
Alternatively, post-money refers to how much the company is worth after it receives the cash investments into it. Post-money valuation includes outside financing or the latest capital injection. Therefore, it is important to differentiate between the two as they are critical concepts in the valuation of any company.
Here’s an example which helps explain the difference:
Suppose an investor is looking to invest in a tech startup. The founder and the investor both agree that the company is worth $2 million, and the investor will put in $500,000.
The ownership % of the founder and the investor will depend on whether this is a $2 million pre-money or post-money valuation. If the $2 million valuation is pre-money, the company is valued at $2 million before the investment. After the investment, the company is valued at $2.5 million. Therefore, if the $2 million valuation takes into consideration the $500,000 investment, it is referred to as post-money.
|Pre-Money Valuation||Post-Money Valuation|
|Value||% Ownership||Value||% Ownership|
As you can see, the valuation method used can have a big impact on the ownership percentages. This is due to the amount of value being placed on the company before investing. So, if a company is valued at $2 million, it is worth more if the valuation is pre-money because the pre-money valuation does not include the $500,000 invested. While this ends up affecting the founder’s ownership by a small percentage of 5 percent, it can potentially represent millions of dollars if the company goes to IPS / exits.
In many cases, it’s very hard to determine what the company is really worth. Valuation becomes a subject of negotiation between the founder and the investor, especially with start-ups and early stage companies.
Calculating Post-Money Valuation
Calculating the post-money valuation is easy. Simply use this formula:
- Post-money valuation = Investment dollar amount ÷ percent investor receives
So if an investment is worth $2 million nets an investor 20%, the post-money valuation would be $10 million:
- $2 million ÷ 20% = $10 million
Bear one thing in mind. This doesn’t mean the company is valued at $10 million before getting a $2 million investment. This is due to the balance sheet showing only shows an increase of $2 million worth of cash, increasing its value by that same amount.
Calculating Pre-Money Valuation
The pre-money valuation of a company comes before it receives any funding. This figure does give investors an indication of what the company would be valued at today. Calculating the pre-money valuation is also easy. But it does require one extra step—and that’s only after you figure out the post-money valuation. Simply:
Pre-money valuation = Post-money valuation – investment amount
Using the example from above to demonstrate the pre-money valuation. In this case, the pre-money valuation is $8 million. That’s because we subtract the investment amount from the post-money valuation. Using the formula above we calculate it as:
- $10 million – $2 million = $8 million
With this knowledge, the pre-money valuation of a company makes it easier to determine its value per individual share. This can be calculated as follows:
Per-share value = Pre-money valuation ÷ total number of outstanding shares
Article written by Peter O’Sullivan, Regional Director at The CFO Centre