You’re back from vacation - and we’re back with our newsletter. Today, we’ll help you understand the difference between pre-money and post-money valuation. In just under 5 minutes. Let’s get started!
What’s pre-money and post-money valuation?
Both concepts tell you how much your startup is worth. The difference? All in the timing.
Pre-money valuation: Think of an almost empty fridge before weekend shopping - that's your startup pre-investment. Pre-money valuation talks about your company's value without the latest round of funding.
Post-money valuation: Now imagine that fridge on a Sunday, just full of groceries. Post-money valuation includes the pre-money company value and the new cash. It tells you how much your company is worth after the funding round.
Why does this matter?
Valuation is the A and Z of external financing. It will decide how much of your company the new investor will own.
Let’s illustrate, shall we?
You and your new investor agree that your company’s worth EUR 5,000,000 and the investor will bring in EUR 1,000,000. No mention of pre-money, no mention of post-money. Let’s see what this would mean for the company ownership:
Your ownership might decrease from 84% to 80% depending on the investor's valuation perspective. If they view the € 5.000.000 as post-money, it aligns with the first scenario. If they see it as pre-money, it's the second scenario. Always clarify which valuation is being discussed.
Dos and don’ts
No worries though, we have a couple of simple tips for you.
Clarify which valuation you're using (pre- or post-)
Update your cap table
Use post-money valuation in investor negotiations
Set valuation too high or too low
Agree to valuation discounts if you fail to meet targets
In a nutshell
Differentiating between pre- and post-money valuation impacts the backbone of every company - your cap table. Getting it right will help you make wiser decisions and be a stronger player in investor negotiations.
Got a question about equity dilution or need guidance in an upcoming investment round? We're here to help. Feel free to reach out through our website. Follow us on LinkedIn and stay tuned for the next newsletter!
Catch you next time! 🚀
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