What is Post-Money Valuation?
The post-money valuation describes the worth of the company after receiving external capital from investors.
Both the pre-money and post-money valuation are describing the worth of the company, but at a different point in time. The post-money valuation describes the worth of the company after receiving external capital (from investors).
Why is it important?
This valuation is crucial for determining, how much each share is worth and how many shares (ownership percentages) will the investor receive in return for his/her investment.
On the other hand, being precise about the valuation (whether it’s pre-money or post-money) can highly affect the investment conditions. For example, let’s imagine that for a startup valued 1,5M$ an investor plans to invest 300K$. If the valuation method is not agreed in advance, the ownership percentages will significantly change within the two occurring scenarios:
- If the 1,5M$ is the pre-money valuation, then the company worth 1,8M$ after the investment, and the investor receives 16,7% of ownership.
- If the 1,5M$ is post-money valuation, then the company worth 1,5M$ after the investment, and this time the investor receives 20% of ownership.
If the nature of the valuation is not specifically agreed upon, it can cause major legal and financial implications after the financing round.
