Post-money valuation explained

Your post-money valuation is the market value of your startup after you’ve taken in outside funding from a funding round or from a one-off investment.

Your pre-money valuation and post-money valuation are important points of negotiation between you and potential investors. In this post we cover what post-money valuation is, how to calculate it and how it affects equity dilution.

In this post

• Pre-money vs post-money valuation: why does it matter?
• How do you calculate the post-money valuation?
• Post-money valuation: ownership and dilution
• Talk to the funding experts

Pre-money vs post-money valuation: why does it matter?

When you talk to investors, you need to agree on a number that reflects your startup’s current worth and future potential – the valuation. The valuation determines how many shares (ie, how much company ownership) they’ll get for the investment amount (ie, the price per share).

But within this idea of the valuation, there are actually two distinct figures: the pre-money valuation and the post-money valuation.

• Pre-money valuation is how much your company is worth before the investment under discussion.
  The pre-money valuation is what is used to set the price per share.
• Post-money valuation refers to how much your company will be worth after the proposed investment into your company.
  After the cash is injected into your company, the post-money valuation becomes the market value of the company.

⚠️ When you talk with your potential investors about the valuation, it’s critical that you are both on the same page about whether you’re using the pre-money valuation or post-money valuation.

If you’re talking pre-money valuation while your investor’s talking post-money valuation, your investor will come away with a lot more equity than you bargained for. The pre-money valuation will be lower, meaning the investor will get more equity for their money.

How do you calculate the post-money valuation?

To calculate the post-money valuation, take your pre-money valuation and add the new funds.

The hard part isn’t calculating the post-money valuation – it’s getting a figure for the pre-money valuation. Your valuation takes into account both tangible and intangible assets – for example, balancing your current net revenue with an informed view of your potential within the market.

Post-money valuation: ownership and dilution

The post-money valuation is important for understanding how existing shareholders’ ownership in the company will be diluted by the incoming funding round.

Imagine a company is raising money at a £5 million valuation, but hasn’t defined whether this is a pre-money or post-money valuation. The difference in dilution is as follows:

Understanding how the new investment will dilute your ownership helps you negotiate fair terms with investors so you don’t give up too much control too early.

The higher the post-money valuation, the less equity you need to give up for the investment. However, be careful not to land on an overinflated valuation. This could cause problems further down the line if you don’t meet the high growth targets that investors expect from a highly valued startup. As with most startup funding decisions, you need to strike the right balance for your specific situation and goals.

Talk to the funding experts

Need to talk through your funding options? Not sure how much equity you need to part with to raise funds? We can help. Choose a time to book a free call with a SeedLegals funding strategist.