Post-money valuation
Encyclopedia
Post-money valuation is the value of a company after an investment has been made. This value is equal to the sum of the pre-money valuation
and the amount of new equity.
External investors, such as venture capitalists and angel investors, will use a pre-money valuation
to determine how much equity to demand in return for their cash injection to an entrepreneur and his/her startup company. The implied post-money valuation is calculated as the dollar amount of investment divided by the equity stake gained in an investment.
This basic example illustrates the general concept. However, in actual, real-life scenarios, the calculation of post-money valuation can be more complicated—because the capital structure of companies often includes convertible loans, warrants, and option-based management incentive schemes.
Strictly speaking, the calculation is the price paid per share multiplied by the total number of shares existing after the investment—i.e., it takes into account the number of shares arising from the conversion of loans, exercise of in-the-money warrants
, and any in-the-money options
. Thus it is important to confirm that the number is a fully diluted and fully converted post-money valuation.
In this scenario, the pre-money valuation should be calculated as the post-money valuation minus the total money coming into the company—not only from the purchase of shares, but also from the conversion of loans, the nominal interest, and the money paid to exercise in-the-money options and warrants.
The post-money valuation is equal to $8 times the number of shares existing after the transaction—in this case, 2,366,667 shares. This figure includes the original 1,000,000 shares, plus 1,000,000 shares from new investment, plus 166,667 shares from the loan conversion ($1,000,000 divided by 75% of the next investment round price of $8, or $1,000,000 / (.75 * 8) ), plus 200,000 shares from in-the-money options. The fully converted, fully diluted post-money valuation in this example is $18,933,336.
The pre-money valuation would be $9,133,336—calculated by taking the post-money valuation of $18,933,336 and subtracting the $8,000,000 of new investment, as well as $1,000,000 for the loan conversion and $800,000 from the exercise of the rights under the ESOP. Note that the warrants cannot be exercised because they are not in-the-money (i.e. their price, $10 a share, is still higher than the new investment price of $8 a share).
Pre-money valuation
A pre-money valuation is a term used in private equity or venture capital that refers to the valuation of a company or asset prior to an investment or financing....
and the amount of new equity.
External investors, such as venture capitalists and angel investors, will use a pre-money valuation
Pre-money valuation
A pre-money valuation is a term used in private equity or venture capital that refers to the valuation of a company or asset prior to an investment or financing....
to determine how much equity to demand in return for their cash injection to an entrepreneur and his/her startup company. The implied post-money valuation is calculated as the dollar amount of investment divided by the equity stake gained in an investment.
Example 1
If a company is worth $100 million (pre-money) and an investor makes an investment of $25 million, the new, post-money valuation of the company will be $125 million. The investor will now own 20% of the company.This basic example illustrates the general concept. However, in actual, real-life scenarios, the calculation of post-money valuation can be more complicated—because the capital structure of companies often includes convertible loans, warrants, and option-based management incentive schemes.
Strictly speaking, the calculation is the price paid per share multiplied by the total number of shares existing after the investment—i.e., it takes into account the number of shares arising from the conversion of loans, exercise of in-the-money warrants
Warrant (finance)
In finance, a warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date....
, and any in-the-money options
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
. Thus it is important to confirm that the number is a fully diluted and fully converted post-money valuation.
In this scenario, the pre-money valuation should be calculated as the post-money valuation minus the total money coming into the company—not only from the purchase of shares, but also from the conversion of loans, the nominal interest, and the money paid to exercise in-the-money options and warrants.
Example 2
Consider a company with 1,000,000 shares, a convertible loan note for $1,000,000 converting at 75% of the next round price, warrants for 200,000 shares at $10 a share, and a granted ESOP of 200,000 shares at $4 per share. The company receives an offer to invest $8,000,000 at $8 per share.The post-money valuation is equal to $8 times the number of shares existing after the transaction—in this case, 2,366,667 shares. This figure includes the original 1,000,000 shares, plus 1,000,000 shares from new investment, plus 166,667 shares from the loan conversion ($1,000,000 divided by 75% of the next investment round price of $8, or $1,000,000 / (.75 * 8) ), plus 200,000 shares from in-the-money options. The fully converted, fully diluted post-money valuation in this example is $18,933,336.
The pre-money valuation would be $9,133,336—calculated by taking the post-money valuation of $18,933,336 and subtracting the $8,000,000 of new investment, as well as $1,000,000 for the loan conversion and $800,000 from the exercise of the rights under the ESOP. Note that the warrants cannot be exercised because they are not in-the-money (i.e. their price, $10 a share, is still higher than the new investment price of $8 a share).