Knowledge Post: What do Pre Money and Post Money mean?

Oleh: Can
September 21, 2012

Valuation is very important.  We will write a more detailed post on valuation methodologies and how the standard valuation methods such as discounted cashflow (DCF) and EBITDA multiples are not that meaningful for seed stage investments.

However, still an important concept is pre-money and post-money valuation, which are meaningful even at the first round of fundraising.

Founders often determine a value for their businesses when they start their round of talks with potential investors.  This value is pre-money valuation, which literally means the value of the company before the investor’s cash is injected.  Say, for our purposes this value is USD 1 million for Sharon’s start-up.

Sharon is seeking USD 250 thousand for her seed round.  And Kelly agrees to invest this amount.   After Kelly’s investment, the company’s valuation is 1.25 million, which is the post money valuation.

By investing 250 thousand in a 1 million pre-money valuation, Kelly has bought 25% of this company.  However, his investment’s post money valuation is 312.5 thousand.  It is important to understand that investors will almost always discuss their investment amount at pre-money valuation as this is the value of the company at the time it is being offered for investment.

Additional useful information can be found in Roger Rappoport‘s informative article on the topic at  www.startupinfo.com.

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