Pre-money valuation
Pre-money valuation is the total value of a company before capital investment by external investors. In other words, it means what the company is worth before someone invests money in it.
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- + Even with angel investment, valuation can be calculated, although in this case it is based on industry comparisons and estimates rather than real market performance.
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- - You should not confuse the pre-investment and post-investment evaluation, because the same amount for one or the other version means a serious difference in your ownership percentage requested by the investor.
The pre-money valuation is the value of a company before the planned capital raising of the company. The pre-investment value of a company is also an extremely important number, as investors can calculate based on this how much of a share they must own in the company after the capital increase in order for the capital raise they plan to bring the expected return.
The pre-money valuation, i.e. the evaluation before the investment, therefore indicates how much the company is worth before the next investment. Investors make their decisions based on this, among other things, about how much share they request in exchange for their capital. The sum of the pre-money valuation and the capital investment will be the value of the post-money valuation.
However, value of a company is never the result of a completely objective calculation. It may contain countless subjective elements, depending on the value the parties attach to certain tools, innovations, and intellectual property or the risks they associate with them.
A pre-investment evaluation always takes place before a company prepares for a public offering (IPO), but also when, in the case of a startup, the angel investor, seed or venture capital investors steps in with financing. Determining the pre-investment valuation is the task of the potential investor in the startup world.
The company's founders and existing investors may even reject this assessment, and a lengthy negotiation or negotiation may begin. This goes on until they can agree on a valuation that is acceptable to both parties.
From the point of view of the startup, it is very important to clarify as soon as possible whether the investor evaluation is pre-money or post-money, because your investor ownership may be completely different in one case or the other. In the case of a $1 million valuation and a $250,000 investment, if it was a pre-money valuation, then 20 percent ownership is justified in exchange for the investment. In the case of post-money evaluation, the same amount means 25 percent.
Last edited: January 2, 2023