Pre-Money & Post-Money Valuations
Written by Michal Dallos
Post- & Pre-Money Valuation

PRE- & POST-MONEY Valuations Calculator

Investment

Amount of the capital invested by an investor in the company

Investor’s Equity

Equity that the investor receives in return for his invested capital

Pre-Money Valuation

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Post-Money Valuation

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During fundraising, startups or SMEs as well as investors should have a good understanding of the difference between pre-money and post-money valuation.

With our Pre- & Post-Money Valuations Calculator, you can individually and easily calculate these two values, based on the intended investment and the number of share investor obtains in exchange. Despite this user-friendly tool, it is necessary to understand the terms Pre- & Post-Money Valuations and their application for any negotiations with investors.

What Are Pre-Money & Post-Money Valuations?

Pre-money valuation refers to the value of the company prior to an investor’s involvement. This reflects the value of the company as a whole, or equivalently the value of the individual company shares before the company receives capital from the investor. At the same time, it serves as a basis for decision about the amount of shares that the investor receives in return for his or her investment.

Post-money valuation refers to the value of the company after an investor’s involvement. Thus, in addition to pre-money valuation, this value also takes into account the inflow of capital.

How to Calculate Pre-Money & Post-Money Valuations?

Post-money valuation is calculated by the following formula:

`\text{Post-Money Value}= \frac{\text{Investor’s Invested Capital}}{\text{% Investor’s Recieved Equity}}`

Alternatively, post-money valuation can be calculated from the number of outstanding shares, the number of newly issued shares, and the offered price per share as follows:

`\text{Post-Money Valuation}= (\text{# Outstanding Shares} + \text{# Newly Issued Shares}}*\text{Price per Share}`

In the simplest case, when there are no secondaries, convertibles, options, or the like to consider, pre-money valuation is straightforward:

`\text{Pre-Money Valuation} = \text{Post-Money Valuation} – \text{Investor’s Invested Capital}`

Mini Case Study 1

A business angel invests in a startup in which he or she receives 15% of the company for 45 TEUR. What are pre-money & post-money valuations of the startup?

Post-Money Valuation = 45.000€ / 0,15 = 300.000€

Pre-Money Valuation = 300.000€ – 45.000€ = 255.000€

Fundraising and the Difference Between Pre-Money & Post-Money Valuations

Confusion as to whether a specific enterprise’s value refers to pre-money or post-money can lead to major conflicts between the existing shareholders and the investor. Taking into account that the value of the enterprise is the reference for the calculation of the shares an investor recieves for his or her money, both parties should reach a common understanding about this at an early stage.

Mini Case Study 2

,Assuming a startup seeks an investment of 300 TEUR at a valuation of 1,2 Mio.€. How does the ambiguity about the reference base, i.e. pre-money or post-money valuation, affect the amount of shares investor recieves for his investment?

In case the company valuation of 1,2 Mio.€ refers to the pre-money value, the amount of the investment of 300.000€ is added to this value. In the opposite case of post-money valuation of 1,2 Mio.€, the pre-money value is 0.9 Mio.€. This results in the following shareholding ratios after the investor’s entry:

Pre-Money Valuation Post-Money Valuation
Value Shares Value Shares
Founder 1,2 Mio.€ 80% 0,9 Mio.€ 75%
Investor 0,3 Mio.€ 20% 0,3 Mio.€ 25%
Total 1,5 Mio.€ 100% 1,2 Mio.€ 100%

As can be seen, the ambiguity in the reference basis of the investment value leads to a 5% shift in the shareholding ratios and, in our case, to a blocking minority of 25% in the case of the post-money valuation–a significant difference.

Caution with Secondaries: Capital Must Flow into the Company

When investors invest in companies, it is often the case that, in addition to the investment in newly created shares (“primary”), shares are also taken over from existing shareholders. In these so-called “secondaries”, no new shares are issued by the company, as the existing shares merely change hands. It is clear that the company does not receive a direct inflow of capital from such a change of ownership; rather, the capital ends up with the selling shareholder. Reasons for this procedure can be an adjustment of the cap table by paying out the smallest shareholders or a partial exit of the founders, who want to partly capitalize the increase in value of the company after a long period of financial drought.

From a pre- & post-money perspective, it is important to note that cash flows from secondaries should not be considered in pre-money & post-money valuations, as they do not benefit the company.

Pre-Money & Post-Money Valuations in the Case of Complex Capital Structures

Due to the significance and urgency of fundraising for startups and the creativity of all parties involved, one can often find quite complex capital structures even in young companies. These include warrants, convertible loans, employee stock option programs (e.g. ESOP), and similar arrangements that influence either the ownership or the flow of capital in the context of an investment.

In the case of such more complex capital structures, the calculation of the number of shares in post-money valuation is much more extensive. For this purpose, the calculation must take into account 1) the exercise of all in-the-money (ITM) options and 2) all shares from the conversion of convertible loans. Then, as usual, post-money valuation is obtained by multiplying the price paid per share by the total number of shares calculated in this way. The post-money valuation thus determined is therefore understood to be based on full dilution, full conversion, and exercise of all ITM options.

The same applies to the calculation of pre-money valuation: the entire capital that flows into the company is deducted from post-money valuation–not only the investment from the investor. This means, for example, that the calculation needs to consider the capital from the conversion of loans, as well as the capital from the exercise of ITM options.

Mini Case Study 3

Suppose a company with 100.000 shares finds an investor willing to invest 160.000€ in the company at 10€ per share. How much are pre-money and post-money valuations under the assumption that the company has the following obligations?

  • Convertible bond in the amount of 100.000€ with a 20% discount at the next financing round
  • Warrant entitling the owner to subscribe 20.000 shares at 11€ each
  • Employee stock option program with 5.000 shares at 5€ per share.

In the first step we calculate the total number of shares:

Post-Money Valuation 1.335.000€
– Investment -160.000€
– Convertible Bond -100.000€
– Employee Stock Option Program -25.000€
– Warrant 0
Pre-Money Valuations 1.050.000€

Now the individual calculation steps in detail:

  • The shares from the new investment correspond to the
    amount of the investment divided by the offered price per share: 160.000€/10€ per share = 16.000 shares.
  • The convertible bond is converted at 80%) of the offered price per share (equivalent to 20% discount): 100.000€/(10€ per share * 80%)= 12.500 shares.
  • The employee stock option program results in a further 5.000 shares.

So all together we get 133,500 shares, which at 10€ per share corresponds to a fully converted, fully diluted post-money valuation of 1.335.000€.

To calculate pre-money valuation, we need to take into account all the capital flows triggered by the conversions and dilutions:

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Let’s again have a look on the individual calculation steps in detail in order to obatin pre-money valuation:

  • The investment of 160.000€ must be subtracted from post-money valuation in the first step.
  • Subsequently, the capital from the converted bond with 100.000€ is subtracted.
  • The employee participation program with 25.000€ (=5.000 shares * 5€ per share) must be subtracted
  • The warrant was not included in this calculation as it is not ITM at 11€ per share, since the option to buy shares at 11€ each is not exercised at the current price per share of 10€.

So, in summary, we find that the investor invests 160.000€ in our model company at post-money valuation of 1.335 Mio.€ and pre-money valuation of 1.05 Mio.€.

Importance of Pre-money & Post-money Valuations in Fundraising

In all financing rounds, it is essential to have a common understanding of the individual key parameters of the deal. The key parameters include the business model, the financial & liquidity plan, the KPIs, and above all the level of necessary investment and its intended use. Right after that, comes the question of the amount of the shares in return for the investment. It is at this point that the founder needs to have clarity on pre-money and post-money valuations of the company.

Pre-money & post-money valuations are based on the general valuation of the company, following the estimated capacity of future earnings, which is mapped in the finance & liquidity plan. We, the Startup CFO, are happy to support you on this complex topic. You can find our services here.

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