- Pre-money vs. post-money valuations
- How is a private company valued?
- Pre-money valuations
- Post-money valuations
- Pre-money vs. post-money
- When do pre-money and post-money valuations matter?
- Pre-money vs. post-money option pool increases
- Preferred shares & pre-money valuations during a priced round
- Pre-seed and seed-stage fundraising
- Fundraise with Carta
When fundraising for your startup, a critical piece of information is the valuation—the worth of your company to potential investors. The valuation is closely linked to the size of the investment and the ownership percentage investors receive for their money, as well as other important deal terms. The two types of valuations founders must be familiar with when pitching investors for a priced round are pre-money valuation and post-money valuation.
How is a private company valued?
A private company’s value can be calculated in several different ways. Common methods include discounted cash flow (DCF) calculations and comparable company analysis. But in order to raise money through priced financing round selling preferred stock, a different set of valuation-related vocabulary comes into play. Pre- and post-money valuations can be modeled based on your company’s cap table, among other factors. Both pre- and post-money valuations interact with dilution, ownership, and liquidation preferences in different ways.
Pre-money valuations
The pre-money valuation represents your company's estimated value before it receives any new capital during a priced round. Essentially, this value sets the baseline for your business's worth at the outset.
Post-money valuations
The post-money valuation gives you an updated snapshot of your company's value after a new priced round of financing is completed. The post-money valuation is the sum of your company’s pre-money valuation plus any new investment.
Post-money valuation = [Pre-money valuation] + [New investment]
Pre-money vs. post-money
Neither pre-money nor post-money valuations are exact appraisals of a company’s assets and liabilities—instead they are an expression of how much investors are willing to invest for a certain percentage of ownership, and they reflect how investors view a company’s prospects for growth.
Investors typically make offers in terms of pre-money or post-money valuation. For example, an investor may offer a startup $10 million at a $50 million post-money valuation. This implies a $40 million pre-money valuation ($40 million pre-money + $10 million investment = $50 million post-money), and in this case the investor would be making an offer for 20% of the company, because $10 million (the size of the offer) is 20% of $50 million (the post-money valuation).
When do pre-money and post-money valuations matter?
Pre- and post-money valuations mainly come into play during a priced round, during which you and your investors will negotiate the valuation of your company before exchanging equity for capital.
Pre-money vs. post-money option pool increases
When investors give you a pre-money valuation in a term sheet, they usually include a target available option pool percentage as a core pricing term. An increase in the option pool is typically counted in the “pre-money shares” and thus will not dilute newer investors. As a result, the larger the option pool increase is, the lower the price-per-share and the higher your investors’ ownership will be.
The option pool size is usually targeted to be large enough to carry the company’s hiring through the next financing event. Option pool increases that occur after the financing round would equally dilute all stockholders, including new investors.
Preferred shares & pre-money valuations during a priced round
Preferred stock is primarily issued to investors ( venture capitalists, angel investors, PE firms) during funding rounds. Investors use a company’s pre-money valuation or post-money valuation to determine the price at which they will purchase preferred shares (this price is known as the purchase price or price per share). In the company’s amended and restated certificate of incorporation (which will be updated during the financing), this will be called the original issue price (OIP).
To calculate the price per share using the pre-money valuation, divide the pre-money valuation amount by the number of pre-money fully diluted shares:
Price Per Share = [Pre-Money Valuation] / [Pre-Money Fully Diluted Shares]
Pre-seed and seed-stage fundraising
During the pre-seed and seed stages, pre- and post-money valuations are less important because investors will provide cash in exchange for a convertible security rather than preferred stock. The two most common types of convertibles are SAFEs (Simple Agreements for Future Equity) and convertible notes. Convertible securities will automatically convert to actual equity shares at a later time, during the first priced round. Convertibles may include a pre-money valuation cap or post-money valuation cap, but the actual pricing remains dependent on the future priced round.
Fundraise with Carta
The decision to use a pre-money or post-money SAFE can have a real impact on your equity ownership percentage and share dilution over time. Carta’s fundraising experts can help walk you through the pros and cons of each.
