Pre-money valuation
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A pre-money valuation is a critical 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.
[edit] Example
Shareholders of company X own 100 shares, which is 100% of equity. If an investor makes a $10 million investment into a company X in return for 20 newly issued shares, the implied post-money valuation 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 $50 million. The initial shareholders dilute their ownership to 100/120=83.33%.
As a second round, an investor agrees to make a $20 million for 30 newly issued shares. Post-money valuation is $20 million*(150/30)=$100 million. The pre-money valuation is $100-$20=$80 million. The initial shareholders further dilute their ownership to 100/150=66.67%.
[edit] See also
[edit] External links
- Forbes Investopedia: What's the difference between pre-money and post-money?
- Ryan Roberts: What is a Pre-money and Post-money Valuation?
- Samuel Wu: Venture Capital 101 for Startups - Valuation
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