- Pre-money valuation
External investors, such as
venture capitalists and angel investorswill use a pre-money valuation to determine how much equity to demand in return for their cash injection to an entrepreneurand his or her startup company. This is calculated on a fully diluted basis.
Usually, a company receives many rounds of financing rather than a big lump sum in order to decrease the risk for investors. Pre- and post-money valuation concepts apply to each round.
Shareholders of company X own 100 shares, which is 100% of equity. If an investor makes a $10 million investment into a company X in return for 20 newly issued shares, the implied
post-money valuationis $10 million*(120/20)=$60 million. To calculate the pre-money valuation, the amount of the investment is subtracted from the post-money valuation. In this case, it is $50 million. The initial shareholders dilute their ownership to 100/120=83.33%.
As a second round, an investor agrees to make a $20 million for 30 newly issued shares. Post-money valuation is $20 million*(150/30)=$100 million. The pre-money valuation is $100-$20=$80 million. The initial shareholders further dilute their ownership to 100/150=66.67%.
* [http://www.investopedia.com/ask/answers/114.asp What's the difference between pre-money and post-money?]
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