Pre-Money vs Post-Money Valuations
The valuation of a company is key to the success of the round of venture capital financing. This valuation requires tricky negotiations between investors and company owners. Having a corporate lawyer can assist you in negotiating a fair valuation. These valuations can have a large impact on the financing your business will receive, so getting them right is important.
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Differences Between Pre-Money Valuation and Post-Money Valuation
A pre-money valuation is the worth of the company before the financing. A post-money valuation is the worth of the company immediately after receiving financing.
Importance Difference Between Pre-Money Valuations and Post-Money Valuations
The difference between these two valuations effects the equity share investors may receive after the financing round. The investor will receive an equity share equal to the percentage of their capital vs the pre-money valuation.
The Post-Money and Pre-Money Valuation
There are two common ways to calculate the post-money valuation:
- Add together the pre-money valuation and the valuation of the investment.
- You can divide the investment value by the number of shares the investor received. Multiply this number by the total shares post-investment.
To determine the pre-money valuation of the company is a little more difficult because it is negotiated between the company and the investors. These negotiations can become heated without legal assistance. A lawyer can keep things calm and rational; they can also ensure your business interests are protected throughout the negotiation process.
Convertible Notes
The venture capital valuation of an important, so negotiations can often become heated, and it will be difficult to resolve. The pre-money valuation of a company can be particularly difficult during the first round. This is where convertible notes help.
Convertible notes are a vehicle which allows startups to raise capital and delay valuation until the company has grown. A convertible note is a loan that converts into equity in a later round of funding. The agreement may include additional assurances or collateral to mitigate the investor’s risk.
Frequently Asked Question
Is the pre-money valuation or post-money valuation more important to a founder of a startup company?
Both the pre-money and post-money valuation are important to a startup. These two valuations both determine the value of your company. The pre-money valuation is slightly more important as it affects the equity share.
Does financing dilute my stock ownership?
Yes, with each round of investment, your ownership share decreases. However, with each round of investment, the more capital you raise and the more you are able to grow your business. Your company’s value will increase with each round of investment, so the value of each share you own will increase.
Either way, there is merit in each decision. It is best to talk things through with a corporate lawyer if you are unsure about what to do.