Pre-money vs Post-money: What’s the difference?
The terms “pre-money value” and “post-money value” are frequently used throughout the course of a venture investment. Given how basic and common these phrases are, one should carefully consider what they mean, and how they affect funding of a venture.
Pre-money valuations and post-money valuations are different in that they represent a company’s worth before and after an investment, respectively. When discussing with venture investors, these are the two words that are most frequently used.
How to Calculate Pre-Movement and Post-Movement Valuation?
The value assigned to a firm before to the investment is known as pre-money valuation. Most frequently, the figure is decided upon following an investor’s offer. It is one of the most important factors for a venture capitalist when he or she is considering an investment.
Post-money valuation is the worth of the company after the investment has been made. The investor offer that the makes determine this value.
Consider an investor offers to invest $100K in exchange for 10% equity share of your company.
According to the following equation we can calculate your company’s value based on this offer.
Post-money valuation = New Investment size / Investor percentage of ownership
Post-money value = $100K / 10% =$1M
So this investor is valuing your business at 1 million dollars after he invested in it. With another simple calculation we can find the value of your business before the investment was made.
Pre-money valuation = post-money valuation – New Investment size
Pre-money value = $1,000,000 – $100,000 = $900,000
So when you are negotiating to set a valuation for your company it is important to discuss whether it is pre-money or post-money valuation.
Let’s consider you have an agreement with an investor to receive a $250,000 investment at $1,000,000 valuation. Investor’s share in the business varies dramatically depending on whether this valuation is pre-money or post-money
What are the pre-money valuation drivers?
- What stage in the startup lifecycle your company is in?
- Revenue, profit, profit margin, users, subscribers, or any other related performance indicator related to your business
- How experienced and established you and your founders are in the industry?
- How many other investors are willing to invest in your company?
- How other similar companies are doing, and how attractive is the market you’re in?
- How is the macroeconomic conditions
Consider a business generates $200,000 in sales each year, with a stable growth rate of 25% YoY and a 20% margin, translating to around $40,000 in EBIDTA per year. The firm may be valued by an investor at one or two times its annual revenue. For instance, if an investor set a 1.5X multiple, the pre-money value of the business is $300,000.
But keep in mind, pre-money valuation of the business is not always based on tangible data. In many cases, (especially in earlier stages of a startup lifecycle) valuation is a negotiated number based on preferences of the two parties.
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