Pre-money and post-money valuation

What it means

Pre-money valuation is the value of a company before a new investment comes in. Together with the amount invested, it determines the stake the investor receives. The value after the investment, the post-money valuation, equals the pre-money valuation plus the amount invested.

For example, if the pre-money valuation is 800 thousand euros and an investor puts in 200 thousand, the post-money valuation is one million euros and the investor gets 20 per cent. The existing shareholders keep 80 per cent, a dilution of their stake, but of a more valuable company.

For start-ups without steady profits, the pre-money valuation is not set by a classic business valuation but by negotiation. It takes account of the team, the market, traction, comparable deals, how much money the company needs and what stake the founders are willing to give up.

How it works in practice

When preparing a funding round we help founders build a cap table showing ownership before and after the investment. We include the employee option pool, because investors often want it created within the pre-money value, which dilutes mainly the founders.

The agreed valuation goes into the term sheet and then into the investment agreement. In a limited company the investment is often made through a combination of a share capital contribution and share premium or a capital contribution outside share capital, which affects both the accounting and the commercial register entry.

With convertible loans the valuation is not set straight away but at the next round, usually with a discount or cap. In our models we therefore run several scenarios so that founders can see what stake they keep at different company values.

What to watch out for

An overly high pre-money valuation in the first round can backfire. If the company fails to reach a higher value in the next round, a down round follows, and investors with anti-dilution protection receive extra shares at the founders’ expense.

The valuation figure is not everything. Liquidation preferences, anti-dilution clauses or veto rights can matter more to founders than a difference in value. With business angels and venture capital funds alike, we therefore read the full terms, not just the valuation.