What are pre-money valuation and post-money valuation?
The pre-money valuation of a company refers to the valuation of the company before an investor injects capital into the company. The post-money valuation of a company refers to the valuation of the company after an investor has injected capital into the company. Therefore, the post-money valuation of a company is always equal to the pre-money valuation plus the amount of capital injected by the investor. Both pre-money valuation and post-money valuation are expressed in terms of dollars.
What are the significance of pre-money valuation and post-money valuation?
Valuation is critical to both the investor and company in a private equity/venture capital (pe/vc) financing. Before an investor invests in a company, the investor will almost always first do a valuation of the company. In a financing transaction (e.g., a Series A round), investors inject capital into a company in return for Series A shares. The pre-money valuation of the company determines how much equity (or the percentage ownership) an investor gets in return for the capital which it injects into the company in that financing.
Example:
A company currently has 4,000,000 common shares held by its founders, being 100% equity of the company.
It is agreed between the company and Investor A that in the forthcoming Series A round, 1,000,000 common shares will be set aside for ESOP.
Therefore, the number of fully-diluted shares of the company before the Series A round is 4,000,000 + 1,000,000 = 5,000,000.
Pre-money valuation:
Before financing, Investor A gives the company a valuation of US$ 4,000,000.
Therefore, the pre-money valuation of the company is US$ 4,000,000.
Purchase price per share:
Each share is valued at $ 4,000,000 / 5,000,000 = $ 0.8 (calculated on a fully-diluted basis).
Post-money valuation:
Now, Investor A invests US$ 2,000,000 into Venture Tech Ltd. in a Series A financing.
Therefore, the post-money valuation of the company will be US$ (4,000,000 + 2,000,000) = US$ 6,000,000.
Number of new shares issued to Investor A in the Series A round:
Since each share is valued at $ 0.8, Investor A gets ($ 2,000,000/$ 0.8) = 2,500,000 Series A shares.
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