What’s The Difference Between Pre-Money And Post-Money?
Pre-money and post-money are valuation measures that differ in their timing.Pre-money is a company’s value before it receives outside financing or an injection of capital. Post-money is its value after receiving financing.Suppose Susan the investor wants to invest in XYZ Corp., a hi-tech startup. She signs on to put in $250,000, and she and the entrepreneur who’s starting XYZ agree that the company is worth $1 million. Susan’s ownership percentage depends on whether the valuation is pre- or post-money, and the swing between the two can be big.It’s worth more to Susan if the valuation is pre-money because it will not include her $250,000. While it may affect the entrepreneur’s ownership by only a small percentage, it can mean millions of dollars if the company goes public.When an entrepreneur has a good idea but few assets, the company’s value is unclear. The entrepreneur and venture capitalist often negotiate its worth in such instances.
Fact checked by David RubinReviewed by Samantha SilbersteinFact checked by David RubinReviewed by Samantha Silberstein
Pre-money and post-money are valuation measures of companies. Both are crucial in determining how much a company is worth. The difference between pre-money and post-money is timing. Pre-money valuation does not include external funding or recent capital injection, while post-money does.
Key Takeaways
- Pre-money and post-money are both ways of valuing companies.
- The difference between them is the timing of the valuation.
- Pre-money valuation is the value of a company before any external funding, or before the latest round of funding.
- Post-money valuation includes outside financing or the latest capital injection.
- When discussing the valuation of a company, it is important to specify which type of valuation it is to give an accurate picture of the company’s financial situation.
Pre-Money Valuation
Pre-money valuation refers to the value of a company not including external funding or the latest round of funding. Pre-money is best described as how much a startup might be worth before it begins to receive any investments into the company. This valuation doesn’t just give investors an idea of the current value of the business, but it also provides the value of each issued share.
Post-Money Valuation
On the other hand, post-money refers to how much the company is worth after it receives investment money. Post-money valuation includes outside financing or the latest capital injection. It is important to know which is being referred to, as they are critical concepts in the valuation of any company.
Why Pre-Money vs. Post-Money Matters
Let’s explain the difference using an example. Suppose an investor is looking to invest in a tech startup. The entrepreneur and the investor both agree the company is worth $1 million and the investor will put in $250,000.
The ownership percentages will depend on whether this is a $1 million pre-money or post-money valuation. If the $1 million valuations are pre-money, the company is valued at $1 million before the investment and after investment will be valued at $1.25 million. If the $1 million valuation takes into consideration the $250,000 investment, it is referred to as post-money.
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As you can see, the valuation method used can affect the ownership percentages in a big way. This is due to the amount of value being placed on the company before investing. If a company is valued at $1 million, it is worth more if the valuation is pre-money than if it is post-money because the pre-money valuation does not include the $250,000 invested.
Important
While the difference between a pre-money and post-money valuation may only impact the entrepreneur’s ownership by only a small percentage, this can represent millions of dollars if the company goes public.
In some cases, it’s very hard to determine what the company is actually worth, and valuation becomes a subject of negotiation between the entrepreneur and the venture capitalist.
Calculating Post-Money Valuation
It’s very easy to determine the post-money valuation. To do so, use this formula:
- Post-money valuation = Investment dollar amount ÷ percent investor receives
So if an investment worth $3 million nets an investor 10%, the post-money valuation would be $30 million:
- $3 million ÷ 10% = $30 million
But keep one thing in mind. This doesn’t mean the company is valued at $30 million before getting a $3 million investment. Why? That’s easy. That’s because the balance sheet only shows an increase of $3 million worth of cash, increasing its value by that same amount.
Important
The difference between pre-money and post-money gets very important in situations where an entrepreneur has a good idea but few assets.
Calculating Pre-Money Valuation
Remember, the pre-money valuation of a company comes before it receives any funding. But this figure does give investors a picture of what the company would be valued at today. Calculating the pre-money valuation isn’t difficult. But it does require one extra step—and that’s only after you figure out the post-money valuation. Here’s how you do it:
- Pre-money valuation = Post-money valuation – investment amount
Let’s use the example from above to demonstrate the pre-money valuation. In this case, the pre-money valuation is $27 million. That’s because we subtract the investment amount from the post-money valuation. Using the formula above we calculate it as:
- $30 million – $3 million = $27 million
Knowing the pre-money valuation of a company makes it easier to determine its per-share value. To do this, you’ll need to do the following:
- Per-share value = Pre-money valuation ÷ total number of outstanding shares
What Is a Startup Valuation?
The valuation of a startup is an assessment of the value of the company. It is determined by a number of factors, including the team behind the company, their network, what stage of development the company is in, whether it has a proof-of-concept, and any sales already made.
Why Does Valuation Matter?
Valuation provides insight to investors regarding how the company will be able to grow in order to meet customers’ needs and reach new business milestones. A company with a higher valuation often will be more attractive to investors and receive more attention. Valuation also determines what ownership investors will have in exchange for putting their money into the business.
Is Post-Money or Pre-Money Valuation Better?
Neither type of valuation is inherently better than the other. A post-money valuation is often simpler for investors. However, pre-money valuations are more commonly used.
The Bottom Line
A company’s valuation is a determination of what it is worth. Pre-money is the valuation before any outside investments. Post-money is what the company is worth after the company receives outside investments.
The valuation of a company should always specify which type of valuation. This not only gives an accurate picture of the company’s financial situation, but it also impacts ownership in the company. The percentage that is owned by outside investors will depend on whether the company’s valuation was set before or after they invested their money.
Read the original article on Investopedia.