TL;DR
Post-Money Valuation is the value of a company after it has received an investment, including the amount of new capital injected into the business.
It represents the company’s total worth immediately after the financing round and is used to determine the ownership percentages of new and existing shareholders.
For example, if a company is valued at $10 million before a $5 million investment, its post-money valuation would be $15 million. This new valuation includes both the previous value of the company (pre-money valuation) and the capital raised during the investment round.
How is Post-Money Valuation Calculated?
The calculation for post-money valuation is straightforward:
Post Money Valuation = Pre Money Valuation + Investment Amount
Where:
- Pre-Money Valuation is the value of the company before the investment.
- Investment Amount is the amount of money invested by the venture capitalists, private equity firms, or other investors in the funding round.
Example:
Let’s consider a startup, TechInnovate, that is raising $3 million from investors. Before the investment, TechInnovate has a pre-money valuation of $10 million.
- Pre-Money Valuation: $10 million
- Investment Amount: $3 million
- Post-Money Valuation: $10 million + $3 million = $13 million
After the investment, the post-money valuation of TechInnovate is $13 million.
How Does Post-Money Valuation Affect Ownership?
Post-money valuation is critical for determining how much ownership the new investors will receive in exchange for their capital, as well as how much existing shareholders (founders, employees, and early investors) will be diluted.
Ownership percentage for new investors is calculated as:
Ownership Percentage = Investment Amount / Post-Money Valuation
Example (Continuing from the Above Scenario):
In the case of TechInnovate:
- Post-Money Valuation: $13 million
- Investment Amount: $3 million
The new investors’ ownership percentage would be:
Ownership Percentage = 3 / 13 ≈ 23.08%
This means that the new investors will own approximately 23.08% of the company after the financing round. The remaining 76.92% will be owned by the founders, early investors, and employees.
Post-Money Valuation vs. Pre-Money Valuation
The key difference between post-money valuation and pre-money valuation is when the valuation is assessed in relation to the investment:
- Pre-Money Valuation: The value of the company before the new investment is added. It reflects the company’s worth based on its existing assets, revenues, intellectual property, and growth potential, without the infusion of new capital.
- Post-Money Valuation: The value of the company after the new investment is factored in, including the additional capital. This valuation includes both the previous value of the company and the new money raised in the funding round.
Example:
If a company has a pre-money valuation of $8 million and raises $2 million in a new investment round:
- Pre-Money Valuation = $8 million
- Investment Amount = $2 million
- Post-Money Valuation = $8 million + $2 million = $10 million
In this scenario, the company’s pre-money valuation is $8 million, and its post-money valuation becomes $10 million after the $2 million investment.
Conclusion
Post-Money Valuation is a key metric in startup financing that reflects the value of a company after new investment capital has been added.
Interested in learning more VC related terms? Head over to our VC glossary!