# Pre-money valuation

"Pre-money valuation" is a term widely used in the private equity and venture capital industries. It refers to the valuation of a company or asset prior to an investment or financing.[1] If an investment adds cash to a company, the company will have a valuation after the investment that is equal to the pre-money valuation plus the cash amount. That is, the pre-money valuation refers to the company's valuation before the investment. It is used by equity investors in the primary market, such as venture capitalists, private equity investors, corporate investors and angel investors. They may use it to determine how much equity they should be issued in return for their investment in the company.[2] This is calculated on a fully diluted basis. For example, all warrants and options issued are taken into account.

Startups and venture capital-backed companies usually receive multiple rounds of financing rather than a big lump sum. This is in order to decrease the risk for investors and to motivate entrepreneurs. These rounds are conventionally named Round A, Round B, Round C, etc. Pre-money and post-money valuation concepts apply to each round.

## Basic formula

There are many different methods for valuing a business, but basic formulae include:[citation needed]

${\displaystyle {\text{Post-money valuation}}={\text{New investment}}\,\cdot \,{\frac {\text{Total post investment shares outstanding}}{\text{Shares issued for new investment}}}}$
${\displaystyle {\text{Pre-money valuation}}={\text{Post-money valuation}}-{\text{Investment amount}}}$

## Round A

Shareholders of Widgets, Inc. own 100 shares, which is 100% of equity. If an investor makes a $10 million investment (Round A) into Widgets, Inc. in return for 20 newly issued shares, the post-money valuation of the company will be$60 million. ($10 million * (120 shares / 20 shares) =$60 million).