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Pre-Money vs. Post-Money Valuation: Differences & Formula

Last updated 03/15/2024 by

Benjamin Locke

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Summary:
Pre-money and post-money are two terms used to describe valuations of a company before and after it raises capital. A pre-money valuation refers to the company’s value before any substantial investment or fundraising while a post-money valuation refers to the value after the capital has been injected. So in an up round, when the pre-money valuation is greater than the previous post-money valuation, investors will feel better than in a down round, when the pre-money valuation has gone down.
These days, it seems like valuations, particularly in tech, can skyrocket in an instant. A guy who used to skip class can start a cryptocurrency platform with $20,000 borrowed from his parents and suddenly have a company worth $100 million. How on earth does this happen? The answer is that he started a company and raised money. With each block of money raised, the valuation of the company grew exponentially greater. When trying to understand these massive valuations, it’s crucial for investors to know if the valuation is pre-money or post-money.
For example, suppose a company is fundraising for a Series B round. In that case, the valuation that they present to investors will be calculated before that round of investment. That valuation is referred to as pre-money. Post-money, on the contrary, refers to the valuation of the company after the capital is raised, so it is often higher. However, it’s important to note that these are valuations on paper. Until the company is either made public or sold, a true valuation based on market forces is difficult to measure.

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Pre-money valuation

Pre-money refers to the valuation of a company before additional fundraising comes in. In many cases, a startup company will pitch a pre-money valuation to investors to raise money after its seed round. However, different companies will raise money at different times, and a pre-money valuation will incorporate the previous post-money valuation when raising a new round of funding. The financial institutions investing money will consider the best cash-on-cash return from their perspective.
As an example, we will use a company called Titus Tech, which has started a 3D-printing business with some amazing proprietary technology. The company received a bit of seed money, and nearly a year later, they are looking for their first round of Series A funding. Based on the metrics of the company, including proprietary intellectual property and cash flow, the pre-money valuation of Titus Tech is $10 million.
Pretty simple right? When Titus execs go to pitch their company to investors, on their PowerPoint deck, they will refer to the valuation of Titus Tech as $10 million. However, all the investors in the room will consider both the current valuation (pre-money) and the value after this fundraising round (post-money).

Post-money valuation and formulas

In most cases, post-money valuations matter more than the actual money received. As the company receives new investments, the value of the company will often be greater on a post-money valuation than the pre-money valuation. However, after the previous round of financing, the post-money valuation can actually fall over time. If the company continues to raise money, this is where the equity multipliers can become exponential. Let’s break this post-money value down into two simple formulas.
Post-money valuation = pre-money valuation + additional capital raised
$25 million valuation = $10 million (pre-money) + $15 million raised
This equation is pretty straightforward. But the post-money valuation can sometimes be considered fluid, particularly if the company is constantly raising funds. Investors may want a share of a booming business, and be willing to give money in exchange for a percentage of ownership in the company. In this case, the formula can work as follows.
Post-money valuation = financing raised / % equity in the company
$250 million valuation = $25 million raised / 10% equity
If a company is successfully raising money over a period of time, the value of the company can grow exponentially in tandem with the ever-growing investment amount and interest. This is how a guy who starts a crypto platform can quickly go from having nothing to owning multiple properties and fancy cars.

Titus Tech fundraising and valuation

Let’s break down Titus Tech’s fundraising over time and what its eventual valuation will be after various rounds of funding.
Series A round on 9/28/2018
Pre-money valuation = $10 million
Investment raised: $5 million for 10% equity in the company
Post-money valuation: $50 million
Series B Round on 8/1/2019
Pre-money valuation: $50 million
Investment raised: $10 million for 10% equity in the company
Post-money valuation: $100 million
You can see that Titus Tech was able to effectively multiply its value 10 times by raising consistent money during each round. It’s also important to note that we have not differentiated between the post-money valuation of the previous round and the pre-money valuation of the next round. Although this is common, it’s not always the case. In many cases, the pre-money valuation could be either higher or lower than the last post-money valuation. Then, it’s called a down round or up round of financing.

Pro Tip

Typically, a company will go through multiple rounds of fundraising to acquire financing. The seed money given by a venture capital financing round or angel investors will typically be the first stage. This is followed by Series A, Series B, Series C, and Series D. The investors will have a much better idea of the actual nuts and bolts of how the company runs during the later rounds of financing.

Up round

In an up round of financing, the pre-money valuation is greater than the post-money valuation in the last round. Consistent up rounds of capital-raising are what gives companies their sky-high valuations in a relatively short period of time. For example, Titus Tech might have signed a contract with a huge semiconductor manager to start 3D-printing an element of the chips or machinery. In this case, its pre-money valuation in August of 2019 might actually go differently.
Titus Tech Up Round
Series A round on 9/28/2018
Pre-money valuation = $10 million
Investment raised: $5 million for 10% equity in the company
Post-money valuation: $50 million
Series B round on 8/1/2019
Pre-money valuation: $80 million
Investment raised: $20 million for 10% equity in the company
Post-money valuation: $200 million

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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Titus Tach’s ability to grow after its initial post-money valuation of the Series A round has enabled it to increase its value substantially. Many VCs and investment banks love to see growth after post-money completion, and it can substantially increase how they value the company. With a down round, however, it’s the opposite.

Down round

In a down round, the pre-money valuation for the next round of financing is lower than the post-money valuation of the last round. In short, the value of the company has shrunk. This can happen for a variety of reasons. In the case of Titus Tech, some of the intellectual property that made Titus Tech valuable was hacked and replicated by a company in Guizhou, China.
Titus Tech Down Round
Series A round on 9/28/2018
Pre-money valuation = $10 million
Investment raised: $5 million for 10% equity in the company
Post-money valuation: $50 million
Series B round on 8/1/2019
Pre-money valuation: $30 million
Investment raised: $4 million for 10% equity in the company
Post-money valuation: $40 million
So you can see that Titus Tech has lost some value between rounds. However, the company is still able to raise money from investors and slightly increase the value — just not to the level it was after the post-money valuation of the last round. Sometimes companies go through periods of struggle. But as long as the investors backing them believe in the overall concept of their business, they can get more chances to grow the valuations.

FAQ

Is equity calculated pre- or post-money?

Equity can be calculated with pre-money valuations or post-money valuations. With a pre-money valuation, the equity is based on the valuation before investment. With post-money, the equity is based on the valuation after the investment.

Is DCF pre-money or post-money?

A DCF (discounted cash flow) valuation will be pre-money. In this case, you would estimate the value of an investment using its expected future cash flows.

How does a post-money SAFE work?

In a post-money SAFE (simple agreement for future equity), the investor can pre-establish what their ownership in the company will be at the beginning of the next round of funding. This is important because, as equity can become diluted when more investors come in, it’s important to know where you stand at the beginning.

What percentage should you give an investor?

There is no set rule; it’s based on what the investor provides and how your business is growing. Is the investor only providing money? Or are they providing leadership and networking as well? Consider all the different ways they can bring value to your company.

Key takeaways

  • It’s important to understand how to calculate pre-money and post-money valuations when raising money or investing in a company.
  • Pre-money refers to the valuation of the company before its latest funding round. Post-money refers to the value of the company after the money has been raised.
  • If the pre-money valuation on the next round of financing is lower than the post-money valuation on the previous round, this is called a down round of financing. If it is higher than the previous post-money valuation, this is called an up round of financing.
  • Consistently successful up rounds with capital injections can result in exponential valuation growth.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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