Basics of Pre-Money vs Post-Money Valuation People get this distinction wrong all the time. Even famous, wealthy celebrities, like those from television’s Dragons’ Den and Shark Tank , get it wrong. So it’s easy for the novice investor to mix it up. The value of the company before you invest is naturally called the pre-money value. The share price is the pre-money value divided by the number of new shares issued. Before you put money in, you own 0% of the pre-money shares. After you invest, you own a percentage of the post-money shares. If you invest $1 million in a company worth $2 million, you buy 1/3, or 33%, of the company (not 1/2!). If the pre-money value is $3 million, you buy 1/4, or 25%, of the company. Post-money value = Pre-money value + Money invested % investor owns = Money invested Post-money value
Pre-Money Valuation
$2M
$3M
Investment Amount
$1M
$1M
Post-Money Valuation
$3M
$4M
Investor Equity Ownership
33%
25%
Company Value from the Investor’s Viewpoint I believe the pre-money valuation to be zero. It’s imputed by the post-money valuation. This is because without the money, the business is worthless. I think it’s better to agree on what the business is worth after the money is added and then how the pie should be divided, based on relative contributions. Of course, it’s also worth nothing without the IP or the management.
There is only value when all the critical ingredients are in place. – Mike Volker , Co-Founder, Vancouver Angel Technology Network
72 A Practical Guide to Angel Investing
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