Pre-money valuation

A pre-money valuation is a term used in private equity or venture capital that refers to the valuation of a company or asset prior to an investment or financing. (If an investment adds cash to a company, the company will have different valuations before and after the investment. The pre-money valuation refers to the company's valuation before the investment.)

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.

Calculation

$\text{post-money valuation} = \text{new investment} \,\cdot\, \frac {\text{total post investment shares outstanding}}{\text{shares issued for new investment}}$

pre-money valuation = post-money valuation − new investment

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%.

Example 2

Lets assume the same Widgets, Inc. in Example 1 gets a second round of financing. A new 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%.

See also

• Post-money valuation

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