What does Pre-money Valuation mean?
Both the pre-money and post-money valuations are describing the worth of the company, but at different points in time. Pre-money valuation stands for the worth of the company before receiving any external funding: in other words, how much the company is worth without additional investments.
Why is it so important?
Doing a valuation is crucial in order to determine how much each share is worth and how many shares (i.e. ownership percentages) the investors will receive in return for their 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 an investor plans to invest 300K$ into a startup valued 1,5M$. If the valuation method is not agreed upon in advance, the ownership percentages will significantly change within the two occurring scenarios:
- If the 1,5M$ is a pre-money valuation, then the company is worth 1,8M$ after the investment, and the investor receives 16,7% of ownership.
- If the 1,5M$ is a post-money valuation, then the company is 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.