What are pre-money valuation and post-money valuation?The pre-money valuation of an organization refers back to the valuation of the corporate earlier than an investor injects capital into the corporate. The post-money valuation of an organization refers back to the valuation of the corporate after an investor has injected capital into the corporate. Due to this fact, the post-money valuation of an organization is at all times equal to the pre-money valuation plus the quantity of capital injected by the investor. Each pre-money valuation and post-money valuation are expressed when it comes to .What are the importance of pre-money valuation and post-money valuation?
Valuation is essential to each the investor and firm in a non-public fairness/enterprise capital (pe/vc) financing. Earlier than an investor invests in an organization, the investor will nearly at all times first do a valuation of the corporate. In a financing transaction (e.g., a Collection A spherical), buyers inject capital into an organization in return for Collection A shares. The pre-money valuation of the corporate determines how a lot fairness (or the proportion possession) an investor will get in return for the capital which it injects into the corporate in that financing.Instance:An organization at present has four,000,000 widespread shares held by its founders, being 100% fairness of the corporate.It’s agreed between the corporate and Investor A that within the forthcoming Collection A spherical, 1,000,000 widespread shares can be put aside for ESOP.Due to this fact, the variety of fully-diluted shares of the corporate earlier than the Collection A spherical is four,000,000 + 1,000,000 = 5,000,000.Pre-money valuation:Earlier than financing, Investor A offers the corporate a valuation of US$four,000,000.Due to this fact, the pre-money valuation of the corporate is US$four,000,000.
Buy worth per share:Every share is valued at $four,000,000 / 5,000,000 = $zero.eight (calculated on a fully-diluted foundation).Publish-money valuation:Now, Investor A invests US$2,000,000 into Enterprise Tech Ltd. in a Collection A financing.Due to this fact, the post-money valuation of the corporate can be US$(four,000,000 + 2,000,000) = US$6,000,000.Variety of new shares issued to Investor A within the Collection A spherical:Since every share is valued at $zero.eight, Investor A will get ($2,000,000/$zero.eight) = 2,500,000 Collection A shares.