Deciphering Jargon: pre-money valuation and post-money valuation

It’s a term that is bandied about often.

  • “I was $10 million post-money valuation!”
  • “They told me I was only $5 million pre-money valuation.”
  • “We’re going to invest in you at a post-money valuation of $20 million.”

It’s much simpler than it seems: they are both ways of assigning value to a company, but the pre-money figure is the startup’s value before an impending round of funding, and the post-money figure is after the round has taken place.

For example, VCFirm is about to invest $6 million in Fundco, and decides they have a $10 million post-money valuation.  This means that VCFirm thinks that Fundco has a $4 million pre-money valuation.

Easy, right?

How does this relate to the investor’s equity?

There is one more wrinkle that sometimes makes these terms worth using.  The pre and post-money valuations are directly correlated to how much equity the investor will own.

For example, VCFirm is about to invest $6 million in Fundco, and decides they have a $10 million post-money valuation.  This assumes a $4 million pre-money valuation.

This means that VCFirm will own 60% of Fundco.

Now suppose that VCFirm invests $6 million in Fundco, but decides they have a $20 million post-money valuation.  This assumes a $14 million pre-money valuation.

In this case, VCFirm will own only 30% of Fundco.

What about the number of outstanding shares?

How exactly will this impact the number of outstanding shares?  Let’s go back to the first example:

VCFirm is about to invest $6 million in Fundco, and decides they have a $10 million post-money valuation.  This means that VCFirm thinks that Fundco has a $4 million pre-money valuation.

Fundco only has 1 million outstanding shares.  This means that pre-money, each share was worth $4.00.

However, Fundco will have to issue new shares to give to VCFirm.

Fundco will issue 1.5 million shares to VCFirm, because that’s how many currently-priced shares VCFirm’s investment of $6 million can buy.

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