Wednesday, March 01, 2006

Definitions: Pre-money & Post-Money

In VC there tends to be lots of jargon and it can certainly exacerbate confusion for anyone attempting to learn about the process of raising capital. One set of the terms that I wasn't sure of when I first started thinking about venture capital were the "pre-money" and "post-money" valuations. However, both of these terms are pretty easy to understand with a simple explanation.

Pre-money refers to the value of the company prior to raising capital and the post-money refers to the value of the company after raising capital. For example, if a company has a $3M pre-money valuation and it raises a $2M round, the post-money valuation is $5M. Share ownership is calculated based on the post-money valuation, thus, in the previous example, $2M raised off of a $5M post-money valuation would buy 40% of company.


At November 28, 2008 9:32 AM, Blogger Shanon said...

"Before the money" or "pre-money" and "after the money" or "post-money" denote simple concepts. However, these simple concepts can even confuse even the most sophisticated analysts at times. If a company is valued at $1 million on Day 1, then 25 percent of the company is worth $250,000. However, there may be an ambiguity. Suppose the company and the investor agree on two terms.The investor may have thought that equity in the company was worth $1,000 per percentage point, in which case $250,000 gets 250 out of 1,000 shares or a 25% equity position. Conversely, the company may have believed that the investor was contributing to the enterprise which was already worth $1 million. Under this rationale, the $250,000 would give the investor 250 shares out of 1,250 shares or a 20% equity position.

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