# Post-money valuation

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Post-money valuation

Post-money valuation is the value of the company after the investment has been made. This value is equal to the sum of the pre-money valuation and the amount of new equity. [ [http://www.markpeterdavis.com/getventure/2008/06/venture-valuati.html Get Venture by Mark Peter Davis: Venture Valuation Overview ] ]

External investors, such as venture capitalists and angel investors, will use a pre-money valuation to determine how much equity to demand in return for their cash injection to an entrepreneur and his/her startup company. The implied post-money valuation is calculated as the dollar amount of investment divided by the equity stake gained in an investment.

Example 1

If a company is worth \$100 million (pre-money) and an investor makes an investment of \$25 million, the new, post-money valuation of the company will be \$125 million. The investor will now own 20% of the company.

This basic example illustrates the general concept. However, in actual, real-life scenarios, the calculation of post-money valuation can be more complicated—because the capital structure of companies often includes convertible loans, warrants, and option-based management incentive schemes.

Strictly speaking, the calculation is the price paid per share multiplied by the total number of shares existing after the investment&mdash;i.e., it takes into account the number of shares arising from the conversion of loans, exercise of in-the-money warrants, and any in-the-money options. Thus it is important to confirm that the number is a fully diluted and fully converted post-money valuation.

In this scenario, the pre-money valuation should be calculated as the post-money valuation minus the total money coming into the company&mdash;not only from the purchase of shares, but also from the conversion of loans, the nominal interest, and the money paid to exercise in-the-money options and warrants.

Example 2

Consider a company with 1,000,000 shares, a convertible loan note for \$1,000,000 converting at 75% of the next round price, warrants for 200,000 shares at \$10 a share, and a granted ESOP of 200,000 shares at \$4 per share. The company receives an offer to invest \$8,000,000 at \$8 per share.

The post-money valuation is equal to \$8 times the number of shares existing after the transaction&mdash;in this case, 2,366,667 shares. This figure includes the original 1,000,000 shares, plus 1,000,000 shares from new investment, plus 166,667 shares from the loan conversion (\$1,000,000 divided by 75% of the next investment round price of \$8, or \$1,000,000 / (.75 * 8) ), plus 200,000 shares from in-the-money options. The fully converted, fully diluted post-money valuation in this example is \$18,933,336.

The pre-money valuation would be \$9,133,336&mdash;calculated by taking the post-money valuation of \$18,933,336 and subtracting the \$8,000,000 of new investment, as well as \$1,000,000 for the loan conversion and \$800,000 from the exercise of the rights under the ESOP. Note that the warrants cannot be exercised because they are not in-the-money (i.e. their price, \$10 a share, is still higher than the new investment price of \$8 a share).

ee also

*pre-money valuation

References

* [http://www.vclocator.com/pdf/26498_Missing_Piece_of_The_Valuation_Puzzle.pdf A Missing Piece of Valuation Puzzle]

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