businessBusiness Coachingbusiness growthconsultantFinanceProcess Improvementsmall-businessPre-Money Vs. Post-Money Valuations: What’s The Difference?

November 10, 2021by amybabashoff0
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Most owners want to grow their business. While dissimilar mission statements influence each unique journey, the goal of creating long-term, profitable growth is universal. And whether you are just starting or established and looking to extensively scale, obtaining financing is necessary to fund business growth. 

In order to accept business investments from angel investors or venture capitalists, you must get familiar with how much your company is valued at, which happens in two different stages: a pre-money and post-money valuation. 

The primary difference between the two is the stage of the funding process that you are currently in. Both pre-money and post-money are valuation measures of companies and are imperative in determining the worth of a company.

What’s the Difference ?

Pre-money valuation takes place prior to raising external funds and post-money takes place immediately after the investments. 

Pre-Money Valuation: 

  • Value taken before an investment is made or the next round of funding 
  • Calculated from the post-money valuation, determining what the company is worth before the investment
  • Founders own 100% of the pre-money valuation

Post-Money Valuation

  • Value taken after the most recent investment is made
  • Calculated from an investor’s offer or investment terms
  • Several investors hold a share of the post-money valuation
Pre-Money Explained 

Pre-money valuation refers to the value of a company not including external funding or the latest round of funding. Basically, pre-money is the dollar amount that the startup may be worth before it begins to receive any investments into the company. Not only does this valuation provide investors an idea of the current value of the business, it also provides the value of each issued share.

A pre-money valuation is somewhat more complex as it uses the post-money valuation from the last round of funding to help determine the value of a business before the next round of funding. This data for future investments can also be used to determine a business’s growth.

Additional factors are entered into the pre-money valuation to help founders and investors reach mutually beneficial agreement. These factors include current market conditions and the value of other industry specific businesses. 

All the above considerations can lead an investor to determine the percentage of ownership and the cost of that percentage. This, in turn, is what gives you a pre-money valuation before an investment is made.

Post Money Valuation

A post-money valuation refers to the worth of a company after it receives funds and investments. This process includes outside financing and uses the investors knowledge of your business to determine the overall value. That is why finding the right investor and the best offer takes time for many entrepreneurs as they are looking for the individual who sees the potential scale and is willing to risk capital for it. 

For example, a previous client of ours was looking to obtain investment into their startup. The owner and the investor we introduced them to mutually agreed that the company worth was $1 million and the investor will put in $350,000.

The ownership percentages depend $1 million is pre-money or post-money valuation. If it’s pre-money, the company is valued at $1 million before the investment and $1.35 million after investment. If the $1 million valuation takes into consideration the $350,000 investment, it is referred to as post-money.

A post-money valuation uses the investors understanding of your business to determine the overall value. That is why finding the right investor and the best offer takes time for many entrepreneurs as they are looking for the individual who sees the potential scale and is willing to risk capital for it.

In some cases, it can be quite difficult to determine what the company is actually worth, and valuation becomes a subject of negotiation between the investor and the founder.

Calculating Post-Money Valuation

The post-money calculation process is quite simple:

Post-money valuation = Investment dollar amount ÷ percent investor receives

So if an investment is worth $2 million nets an investor 10%, the post-money valuation would be $20 million:

$2 million ÷ 10% = $20 million

However, because the company’s balance sheet only shows a cash increase of $2 million, this doesn’t mean the company is valued at $20 million before receiving a $2 million investment-it increases its value by that same amount.

Calculating Pre-Money Valuation

While pre-money valuations occur before receiving funding, this does give investors a calculated idea of what the company would be valued at today. This calculation is not difficult, but it does require one extra step once you’ve figured out the post-money valuation. See below:

Pre-money valuation = Post-money valuation – investment

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:

$20 million – $2 million = $18 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

Which Is More Important for a Business?

Both a pre- money valuation and post-money valuation are important for successfully raising funds for different reasons. 

A later-stage startup may be more interested in a post-money valuation as it looks toward going public and selling shares of the company beyond just venture capitalists. Further, the later the stage, the more important it is to ensure your investors see at least 5x ROI, or a 25% rate of return, in a few years’ time.

Early-stage businesses may find more importance in pre-money valuation and the opportunity inherent in their business. Early stage businesses commonly bring in smaller, seed investments from parties including friends and family.

Final Thoughts

Effective management of your business funds begins with a strong and healthy financial plan.

The first step in creating a fool-proof plan: seek counsel of trusted professionals to advise you through the headache involved in your business valuation and its relevance to investors. Whether you are rehearsed in valuation measures and/or investor negotiations, perpetually changing market conditions stress the importance of turning to those with a proven and successful track record.

Here at MCDA CCG, we can be that trusted advisor! With years of expertise covering a broad range of business sectors- as well as the latest news, trends, laws, and regulations, we can make this process feel as simple as possible. We simplify the process of business valuations while matching our clients to appropriate investors.

With cost competitive pricing and a no obligation introductory call, you have nothing to worry about; contact our office headquarters in Placentia, Orange County, California, today!

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