Answer:
If you’re a startup looking to raise capital, you’ve likely heard the terms ‘pre-money valuation’ and ‘post-money valuation’ thrown around. But what do they mean?
Pre-Money Valuation
A company’s pre-money valuation is the value of the startup immediately before an investment round takes place. It’s the valuation which determines how many shares the investor will receive in return for their investment and what percentage of the company they will control.
You can determine your startup’s pre-money valuation in a number of ways, but the factors that play a key role in the calculation include:
- how much money the startup wants to raise;
- how much of the company’s ownership that the founders are willing to give away in exchange for capital; and
- how much an investor is willing to pay for their shares.
When deciding what a reasonable starting point for negotiations with an investor is, it’s helpful to compare your startup with other similar businesses and to look at what their valuation was at their various stages.
Post-Money Valuation
The post-money valuation of the company is more straightforward to calculate. It’s the value of the startup immediately after you have raised the round. If you raised your round at a $1,000,000 pre-money valuation and you received $200,000 from your investors, your company’s post-money valuation is $1,200,000.
You can speak to your accountant, business broker or other financial advisors to assist you with determining your valuation. However, the most crucial conversation that you will have when settling on the figure will be between you and your investors.
