Businesses trying to raise investment capital will eventually hear the terms “pre-money valuation” and “post-money valuation.” But what do these terms mean, and why are they important?
- Pre-money valuation: a valuation of your business before investment
- Post-money valuation: a valuation of your business after investment
In other words, the post-money valuation equals the pre-money valuation plus the investment.
These terms are important because of their effect on ownership dilution. Let’s say you raise $1 million of investment on a $5 million valuation. How much company ownership does the new investor have? It depends on whether the $5 million is a pre-money or post-money valuation.
- Pre-money: $5 million valuation + $1 million investment = $6 million. The investor owns 16.7% of the company.
- Post-money: $5 million valuation already includes the $1 million investment. The investor owns 20% of the company.
Check out this Entrepreneur.com article for a more detailed explanation, including some good examples for all you numbers folks out there.