How to Calculate Pre-Money and Post-Money Valuations
Q: I keep hearing about "pre-money" and "post-money" valuation, but frankly, I'm a bit confused about what it means and how to calculate it. Can you please provide some guidance?
A: The “Pre-Money” value is the valuation of your company prior to an investment.
Formula: The Pre-Money value = the number of shares outstanding on a fully-diluted basis (include all issued, but unvested options and warrants as if they will be fully issued, vested, and exercised) x $ price/share
The “Investment” is the amount of money the investor(s) invest(s).
The “Post-Money” value is the sum of the Pre-Money value and the Investment.
Formula: Post-Money value = Pre-Money Value + Investment Amount
The percent of the Investor's ownership is expressed as follows:
Formula: Investor’s ownership = Investment / Post-Money value
Example: If your seed capital investor and you agreed through negotiation that your startup was worth $1 million at the time of the angel investment, then the Pre-Money value is the $1 million. If your investor then invested $0.5 million in the startup, then the Post-Money valuation of your startup is $1.5m (the Pre-Money + the Investment) and your investor would end up with an ownership of one-third of the company calculated as follows: $500,000/$1,500,000 = 33.33%.
The good news is that our Startup Financial Model app automatically calculates your Share Price, Pre-Money and Post-Money valuations, as well as the ownership for each ownership class for each round based on your inputs of the amount invested and the number of shares sold. Our app also produces an Ownership and Capitalization table for you, automatically inserts the cash impact on your financial statements, updates your overall startup budget, and produces a detailed investor return summary for you.
Please see this blog post on entering equity assumptions for additional guidance.