What is pre-money valuation?

Updated: Jun 6, 2018

Don't make a costly mistake when discussing valuation with savvy investors

Pre-money valuation determines what percentage of the company the VC will take

Investors often have two ways to talk about valuation, and this sometimes confuses entrepreneurs raising funds.

The difference can amount to quite a few percentage points in dilution, so it’s important to be clear about it.

It's easy once you know the basics.

Pre-money valuation is the value of 100% of your company’s shares BEFORE the fundraising is complete.

If you add to it the money being raised, you get the POST-MONEY valuation of the company.

Example 1

If you raise $1M at a $2M pre-money valuation, your post-money valuation is (yes…) $3M.

The percentage the investor gets is calculated on the POST-MONEY valuation.

Here, the shareholder gets 1/3 of the company’s shares — and not 50%, as commonly believed.

Example 2

If an investor says:

“I want 20% of the company for $200,000”

It means the POST-MONEY valuation is $1M, and the pre-money valuation is… $800,000.

You will, therefore, issue shares based on that valuation.

Assuming you have 100,000 shares outstanding, each share is worth $8, and since you need to raise $200,000 you will issue 25,000 new shares.

In the end, you still own 100,000 shares but out of a total 125,000, so you now own 80% of the company, and the investor the remainder or 20%.

It will take some practice but you will quickly become an expert at pre- and post-money valuations.

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