Private Equity: Episode 24 – Pre-money and Post-money Valuation

These are crucial concepts in fundraising, especially for startups, and it's important to understand the distinction between pre-money and post-money valuations.

• The post-money valuation is the value of the company after receiving investment from investors.
• The pre-money valuation refers to the value of the company before receiving this investment.

This distinction can be summed up with a simple formula:
Post-money valuation = Pre-money valuation + Funds raised

In order to receive money from investors, the company’s capital must be increased. Before the capital increase, the company's shares reflect its pre-money value.

• Value of a share = Pre-money valuation ÷ Total number of shares.

To incorporate the investment, the company must issue new shares that represent the amount brought in by the investors.

• Number of shares to issue = Funds raised ÷ Share price.

As a result, both the number of shares and the company’s valuation will increase proportionally.

Let's consider an example:
A company is valued at €900K pre-money and raises €100K. The company’s capital currently consists of 100 shares.

• Post-money valuation = Pre-money valuation + Funds raised
  Post-money valuation = 900,000 + 100,000 = 1,000,000
• Share value = Pre-money valuation ÷ Total number of shares
  Share value = 900,000 ÷ 100 = 9,000
• Number of shares to issue = Funds raised ÷ Share price
  Number of shares to issue = 100,000 ÷ 9,000 = 11.11

We round to a convenient number, either up or down, depending on the needs:

• Issue 11 shares for €99,000
• Issue 12 shares for €108,000

Thus, the new share capital would be either 111 shares (for 11 shares issued) or 112 shares (for 12 shares issued).

• Investor ownership percentage = Number of shares held × 100 ÷ Total number of shares (111 or 112).

Investment funds, particularly in Venture Capital, typically spend a lot of time negotiating pre-money and post-money valuations when they want to invest in a company!

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