Start-up terms: pre-money vs. post-money
02 Jan 2023
Start-up terms: pre-money vs. post-money
These are common terms in the investment banking and private equity/venture capital industries, and you may have heard them on entrepreneur-led investment TV shows. It is common to see the common man getting jumbled up in start-up dictionaries and jargon. Here’s a concise, smooth read on the basic meaning of startup terms.
So, what exactly is the distinction between pre-money and post-money valuation?
It is basically the value of a company before and after it receives an investment from private equity investors or venture capitalists.
So, in layman's terms, pre-money valuation refers to the value of the company before the investment is initiated, while post-money valuation refers to the value of the company after the investment is initiated.
Both are equally important, as pre-money valuation provides a basis for determining the value of the company business and the amount of stake (equity) that the investor will receive in exchange for their investment, while post-money valuation reflects the total value of the company after the investment has been made.
For example, if a company has 100 shares issued to a promoter or promoters and is now issuing another 50 shares to an investor at a price of Rs 1000 per share,
This would mean a total investment of Rs 50,000.
This would make the total valuation of the business after the investment at
Post-money valuation: 150 shares x Rs. 1000
Post-Money Valuation = Rs. 150,000
This would be the post-money valuation.
Now, the pre-money valuation?
Post-Money-Valuation - Capital Invested = Pre-Money-Valuation
Thus Pre-Money Valuation = Rs. 150,000 – Rs. 50,000
Pre-Money Valuation = Rs. 100,000
Hence, in the above case, by investing Rs 50,000, the investor will hold 33% of the post-money firm. (50,000/150,000)