What is a Pre money and Post money?

Posted by Pierre de la Fortune on August 14, 2015 @ 12:01 a.m.

Written by Ryan Roberts

When your startup company raises capital, valuation is a key question that must be tackled Rey Maualuga style. (If you are unfamiliar with Rey Maualuga style, click here for a Youtube example.) The two main valuation concepts in a venture capital financing are pre-money and post-money valuation. In a venture capital transaction, the venture capital firm invests cash in the startup company in exchange for newly-issued (preferred) stock. The startup companys value immediately before the funding is called pre-money valuation while the startup companys value immediately after the transaction is called post-money valuation. (Technically, pre-money and post-money are more about price than a startup companys valuation.)

Pre-money Valuation and Post-money Valuation Equations (1) Pre-money Valuation = Post-money valuation Venture Capital Investment (2) Post-money Valuation = Venture Capital Investment/Venture Capital Ownership Percentage You can determine share price by the following equation: (3) Share Price = Pre-money Valuation/Number of Pre-money shares. You can determine how many shares to issue the venture capital firm by this equation: (4) New Shares Issued = Venture Capital Investment/Share Price

Pre-money Valuation and Post-money Valuation Examples

Example 1 Lets say Googles new venture fund comes to you and offers to invest $3MM into your startup for 30% of the company. Plugging the numbers into equation (2), we get:

Post-money valuation = $3MM/.30 = $10MM Thus, to calculate pre-money valuation, we use equation (1) as we now know the post-money valuation and the investment amount:

Pre-money valuation = $10MM $3MM = $7MM Example 2

Now lets say a venture capital firm offers your startup company a $4MM investment at a $6MM pre-money. To determine how much your startup would give up in exchange for the $4MM, we use equation (1) and get: $6MM = Post-money valuation $4MM, and solving for Post-money valuation (Post-money = Pre-money + Investment) gives us $10MM Next, we use equation (2) to find the Venture Capital firms percentage: $10MM = $4MM/Venture Capital Firm Ownership Percentage (VCFOP), solving for VCFOP (VCFOP = $4MM/$10MM) we get 40%.

For more info please visit: http://startuplawyer.com/venture-capital/what-is-a-pre-money-and-post-money-valuation

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