Read this FAQ about how to define your early-stage tech startup’s valuation and what the market ranges are within the different funding rounds.
Pre-money valuation refers to the value of a company prior to any outside investment. It is the estimated worth of the company based on factors such as its assets, intellectual property, revenue, and market potential. Pre-money valuation is important for investors and startups alike, as it helps determine the amount of ownership that an investor will have in the company in exchange for their investment. It is also a key factor in determining the post-money valuation, which is the company’s value after the investment has been made. Understanding pre-money valuation is crucial for startups looking to secure funding and for investors seeking to make smart investment decisions.
This is the value of a company after new funding has been added to it. It’s an important metric that helps determine the percentage of ownership that investors receive in exchange for their investment. For example, if a startup has a pre-money valuation of $2 million and receives a $500,000 investment, the post-money valuation would be $2.5 million. This new valuation is used to calculate dilution or the percentage of ownership that existing shareholders will lose as a result of the new investment. To understand how post-money valuation affects dilution and ownership percentages, it’s important to work with an experienced financial advisor or consultant.
When an investor wants to buy 20% of the company, it is typically calculated based on the pre-money valuation. For instance, if the pre-money valuation is $2 million, the investor wants to invest $400,000 for 20% of the company. This means that the post-money valuation would be $2.4 million ($2 million pre-money valuation + $400,000 investment).
It’s important to have this alignment upfront to avoid any confusion or misunderstandings later on. If other shareholders exercise their pre-emption rights and invest alongside the investor, the ownership percentage will be diluted since more money will be added to the post-valuation of the company.