{"id":1613,"date":"2019-10-11T14:03:56","date_gmt":"2019-10-11T08:33:56","guid":{"rendered":"https:\/\/rzplearn.com\/?p=1613"},"modified":"2020-08-28T09:15:21","modified_gmt":"2020-08-28T03:45:21","slug":"pre-post-money-valuation-meaning-definition","status":"publish","type":"post","link":"https:\/\/razorpay.com\/learn\/pre-post-money-valuation-meaning-definition\/","title":{"rendered":"Pre-money & Post-money Valuation: An Overview"},"content":{"rendered":"

Pre-money valuation<\/b> refers to the value of a company excluding the latest round of funding. Simply put, pre-money valuation evaluates the worth of the startup before it steps out to receive the next round of investment. Post-money valuation<\/b>, on the other hand, refers to the value of a company after it raises money and investment for itself. This includes outside financing or the latest rounds of funding.<\/span><\/p><\/blockquote>\n

The world of startups has a dictionary of its own and sometimes, it gets difficult to understand all of the jargon out there. Ever stumbled upon the word ‘<\/span>pre & post-money valuation\u2019<\/span><\/i> before tying your seatbelts for the rounds of funding?<\/span><\/p>\n

Here\u2019s a concise read on what these mean and how to calculate them.<\/span><\/p>\n

What Is pre-money & post-money valuation?<\/span><\/h2>\n

Pre-money valuation<\/b> refers to the value of a company excluding the latest round of funding. Simply put, pre-money valuation evaluates the worth of the startup before it steps out to receive the next round of investment.\u00a0<\/span><\/p>\n

Pre-money valuation does not just give investors an idea of the current value of the company but also provides the value of each issued share.\u00a0<\/span><\/p>\n

Recommended Read:<\/strong> Startup Funding In India: An Overview\u00a0<\/a><\/span><\/i><\/p>\n

Post-money valuation<\/b>, on the other hand, refers to the value of a company after it raises money and investment for itself. This includes outside financing or the latest rounds of funding.<\/span><\/p>\n

Since adding cash to a company\u2019s balance sheet increases its equity value, the post-money valuation always remains on the higher side when compared to the pre-money valuation.<\/span><\/p>\n

What is the difference between pre-money & post-money valuation?<\/span><\/h2>\n

This difference between the pre-money valuation and the post-money valuation matters because it ultimately defines the equity share that the investors will be entitled to, post the funding rounds.\u00a0<\/span><\/p>\n

For example, if an investor gives the company capital of $2,50,000, he would receive an equity share of 20%, if the pre-money valuation of the company were $1 million. This percentage jumps to 25% if the pre-money valuation of the company were set to $7,50,000. Clearly, this can have a dramatic leg; and financial implications on the company, after the funding is over.<\/span><\/p>\n

How to calculate pre-money & post-money valuation<\/span><\/h2>\n

Calculating post-money valuation\u00a0<\/span><\/h3>\n

Comparatively, it is easier to calculate the post-money valuation of the company. Here\u2019s how you can find this:\u00a0<\/span><\/p>\n

Post-money valuation= Investment Dollar Amount \/ Percent Investor Receives\u00a0<\/b><\/p>\n

So if an investment is worth $3 million nets an investor at 10%, the post-money valuation will be $30 million.<\/span><\/p>\n

$3 million \/ 10% = $30 million<\/span><\/p>\n

Please note, this does not mean that the company is valued at $30 million. Wondering why? The balance sheet of the company shows an increase of just $3 million (in cash), hence increasing the company\u2019s value by the same amount.\u00a0<\/span><\/p>\n

Also Read:<\/strong> All You Need To Know About Balance Sheets<\/a><\/span><\/i><\/p>\n

Calculating pre-money valuation\u00a0<\/span><\/h3>\n

Remember that the pre-money valuation of a company is the company\u2019s valuation before any funding comes into the picture. But this is important since it gives investors a picture of what the company is valued in the present day. Calculating the pre-money valuation is not difficult but it just requires one extra step: calculating the post-money valuation. Here\u2019s how you can find this:<\/span><\/p>\n

Pre-money valuation= Post-money Valuation – Investment Amount<\/b><\/p>\n

Let\u2019s use the example mentioned above to understand this better. Here, the pre-money valuation will be $27 million. It is because we subtract the investment amount from the post-money valuation amount.\u00a0<\/span><\/p>\n

Pro-tip:<\/b> Knowing the pre-money valuation of a company makes it easier to determine its per-share value. Here\u2019s how you can find it:<\/span><\/p>\n

Per-share value=Pre money valuation \/ Total Number Of Outstanding Shares\u00a0<\/span><\/p>\n

Key Takeaways<\/span><\/h2>\n