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What is the Difference Between Pre-money & Post-money Valuation?

What is the Difference Between Pre-money & Post-money Valuation?

What is the Difference Between Pre-money & Post-money Valuation?

By

Dave Jobes, Ph.D.

If you have started a new company, and are looking for investors, you’ll very quickly get asked the question, “what is your valuation”? In this post, I’ll explain what that question means and show you my favorite tool for calculating it.

So what is meant by “valuation”? In the context of a private company, it actually means your pre-money valuation. The pre-money valuation is the value of your company prior to taking in any investment dollars. So it is effectively the baseline value of your company. Contrast that with the post-money valuation. The post-money valuation then is the pre-money valuation + investment amount. For example, if your pre-money valuation is $18 million and you bring in a $2 million investment, your post-money would be $20 million ($18M pre + $2M investment = $20M post). Figure 1 is another example of a pre- and post-money valuation calculation, which also shows the percent ownership of the new investor.  

Example Valuation

Figure 1

You’ll want to get good at calculating the pre- and post-money valuations as you will get asked this all the time during your fundraising efforts. Of course, this whole process is much more complicated than I’ve shown here because how one calculates the pre-money valuation varies widely amongst investors and entrepreneurs. I was recently at an event with VCs (venture capitalists) and asked one the question of how he calculates pre-money valuations for companies he looks at investing in. His answer? A combination of “comps” (comparables or companies that are similar in size, scope, and development) and a “gut feeling”. This is actually a quite common response as there are really no good objective methods for determining valuations for pre-revenue, private companies. People will suggest NPV (net present value), DCF (discounted cash flow) and other methods but those are very easy to manipulate for early-stage companies, so, in my mind, have very little value. So be prepared to do a lot of discussions/arguing about your pre-money valuation when you meet with investors!

I’ll close with a link to my favorite (and free!) pre- and post-money valuation calculator: Omni Calculator. Omni also offers a wide range of other financial calculators (like NPV and DCF), and I highly recommend them. Once you get deeper into the fundraising process though, you’ll definitely want to use more ‘official’ tools (often provided by your attorney), but Omni is a great place to get you started. (Side note: Omni actually has many, many different types of calculators covering a wide range of topics, so check those out too).