Pre-money valuation
Encyclopedia
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
.
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 or her startup company
. This is calculated on a fully diluted basis.
Usually, a company receives many rounds of financing rather than a big lump sum in order to decrease the risk for investors. Pre- and post-money valuation concepts apply to each round.
is:
To calculate the pre-money valuation, the amount of the investment is subtracted from the post-money valuation. In this case, it is:
The initial shareholders dilute their ownership to 100/120 = 83.33%.
The pre-money valuation is:
The initial shareholders further dilute their ownership to 100/150 = 66.67%.
Private equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
or venture capital
Venture capital
Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...
that refers to the valuation
Valuation (finance)
In finance, valuation is the process of estimating what something is worth. Items that are usually valued are a financial asset or liability. Valuations can be done on assets or on liabilities...
of a company or asset prior to an investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
or financing
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
.
External investors, such as venture capitalists and angel investors will use a pre-money valuation to determine how much equity
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
to demand in return for their cash injection to an entrepreneur
Entrepreneur
An entrepreneur is an owner or manager of a business enterprise who makes money through risk and initiative.The term was originally a loanword from French and was first defined by the Irish-French economist Richard Cantillon. Entrepreneur in English is a term applied to a person who is willing to...
and his or her startup company
Startup company
A startup company or startup is a company with a limited operating history. These companies, generally newly created, are in a phase of development and research for markets...
. This is calculated on a fully diluted basis.
Usually, a company receives many rounds of financing rather than a big lump sum in order to decrease the risk for investors. Pre- and post-money valuation concepts apply to each round.
Calculation
Example 1
Shareholders of Widgets, Inc. own 100 shares, which is 100% of equity. If an investor makes a $10 million investment into Widgets, Inc. in return for 20 newly issued shares, the implied post-money valuationPost-money valuation
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....
is:
- ($10 million) · 120 / 20 = $60 million
To calculate the pre-money valuation, the amount of the investment is subtracted from the post-money valuation. In this case, it is:
- $60 million – $10 million = $50 million
The initial shareholders dilute their ownership to 100/120 = 83.33%.
Example 2
Lets assume the same Widgets, Inc. in Example 1 gets a second round of financing. A new investor agrees to make a $20 million investment for 30 newly issued shares, if you follow the example above, it has 120 shares outstanding. Post-money valuation is:- $20 million · 150 / 30 = $100 million.
The pre-money valuation is:
- $100 million – $20 million = $80 million.
The initial shareholders further dilute their ownership to 100/150 = 66.67%.