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ACADEMY: What is pre-money valuation?

Posted by Erica Duignan Minnihan on Jul 12, 2016 11:00:00 AM

 

Pre-money valuation is a term you often hear in the investing circles. This simply means the amount of value that is ascribed to the company by investors BEFORE the investment dollars go in. It’s mainly used as a benchmark to determine the amount of equity that new investors will get in a startup. So if the “pre-money valuation” is $4 million, and the investors put in $1 mm, in theory, the founders own 80% of the company and the investors own 20% of the company. However if the pre-money is $4 mm and the investors put in $2 mm, now the founders only own 66% of the company and the investors own 33% of the company. The pre-money valuation PLUS the amount invested gives you the “post-money valuation”. In our first example it was $5 million ($4mm pre-money plus $1 mm invested capital) and in our second example the post-money was $6 million ($4 mm pre-money plus $2 million invested capital). Using the pre-money valuation as a basis for investment is more common than post-money, because the value of the existing equity is not decreased based on the amount of additional capital the founders can raise.

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Topics: Venture Investing Academy