Pre-money valuation
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A pre-money valuation is a critical term used in private equity or venture capital that refers to the valuation of a company or asset prior to an investment or financing.
External investors, such as venture capitalists and angel investors will use a pre-money valuation to determine how much equity to demand in return for their cash injection to an entrepreneur and his or her startup company. This is calculated on a fully diluted basis.
Usually, a company receives many rounds of financing rather than a big lump sum in order to decrease the risk for investors. Pre- and post-money valuation concepts apply to each round.
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[edit] Calculation

PreMoneyValuation = PostMoneyValuation − NewInvestment
[edit] Example 1
Shareholders of Widgets, Inc. own 100 shares, which is 100% of equity. If an investor makes a $10 million investment into Widgets, Inc. in return for 20 newly issued shares, the implied post-money valuation is:
($10 million) * 120 / 20 = $60 million
To calculate the pre-money valuation, the amount of the investment is subtracted from the post-money valuation. In this case, it is:
$60 million - $10 million = $50 million
The initial shareholders dilute their ownership to 100/120 = 83.33%.
[edit] Example 2
Lets assume the same Widgets, Inc. in Example 1 gets a second round of financing. A new an investor agrees to make a $20 million investment for 30 newly issued shares, if you follow the example above, it has 120 shares outstanding. Post-money valuation is:
$20 million * 150 / 30 = $100 million.
The pre-money valuation is:
$100 million - $20 million = $80 million.
The initial shareholders further dilute their ownership to 100/150 = 66.67%.
[edit] See also
[edit] External links
- Forbes Investopedia: What's the difference between pre-money and post-money?
- Ryan Roberts: What is a Pre-money and Post-money Valuation?
- Samuel Wu: Venture Capital 101 for Startups - Valuation
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