What is Pre/Post Money Valuation?
Pre-money and post-money valuations are terms used in venture capital and startup financing to describe a company's value before and after receiving investment.
Pre-money valuation is the value of the company before it receives new investment. This represents what the existing shareholders believe the company is worth.
Post-money valuation is the value of the company after it receives investment. It equals the pre-money valuation plus the investment amount.
The Valuation Formula
Post-Money = Pre-Money + Investment
Investor Ownership:
Investor % = Investment / Post-Money Valuation x 100
Price Per Share:
Price = Pre-Money Valuation / Existing Shares
New Shares Issued:
New Shares = Investment / Price Per Share
Understanding Equity Dilution
When a company raises capital, existing shareholders experience dilution - their ownership percentage decreases even though the value of their shares may increase.
| Before Investment | After Investment |
|---|---|
| Founders own 100% | Founders own lower % (diluted) |
| Pre-money value per share | Post-money value per share (higher) |
| Total value = Pre-money | Total value = Post-money |
Worked Example
A startup has a pre-money valuation of $5 million. An investor offers $1 million:
- Post-money valuation: $5M + $1M = $6M
- Investor ownership: $1M / $6M = 16.67%
- Founder ownership: 100% - 16.67% = 83.33%
- If 1M shares existed, price per share = $5M / 1M = $5
- New shares issued: $1M / $5 = 200,000 shares
Factors Affecting Valuation
- Revenue and Growth Rate: Higher revenue and faster growth justify higher valuations
- Market Size: Larger addressable markets support higher valuations
- Team Experience: Experienced founders command premium valuations
- Competitive Landscape: Unique advantages increase valuation
- Traction: User growth, partnerships, and milestones matter
- Market Conditions: Bull markets inflate valuations
Negotiation Tips
For Founders
- Focus on pre-money valuation in negotiations
- Consider future dilution from additional rounds
- Balance valuation with investor value-add
- Protect against down rounds with anti-dilution provisions
For Investors
- Focus on ownership percentage targets
- Consider fully-diluted ownership (including option pool)
- Factor in follow-on investment reserves
- Negotiate protective provisions
Frequently Asked Questions
Can a company have negative valuation?
No. Both valuations represent company value, which cannot be less than zero. A struggling company might have a very low valuation but never negative.
What's the difference between valuation and price?
Valuation is the total company worth. Price per share is valuation divided by total shares. Both matter in different contexts.
How is the option pool handled?
Option pools are typically created from pre-money shares, meaning founders bear the dilution. A 10% option pool on $5M pre-money effectively reduces founder value by $500K.
What if there's no revenue yet?
Pre-revenue startups are valued based on team, market potential, technology, and comparable company valuations. This is more art than science.