Understanding the post-money valuation
A post-money valuation is the determined value of a company after it has raised a fresh round of funding.
- A post-money valuation is the projected value of a firm after obtaining outside investment or funding.
- The post-money value is seen as an important predictor of a company’s performance.
- The post-money value is used by investors to calculate their ownership position in a firm.
A startup’s valuation of £1 billion might signify a variety of things. It is commonly believed to signify that the startup has a post-money valuation of at least £1 billion.
What exactly is a Post-Money Valuation?
A post-money valuation is the projected value of a firm after obtaining outside investment or funding. So, if a company was valued £10 million before raising another £5 million, its post-money valuation would be £15 million.
Pre-Money Valuation + Investment Amount = Post-Money Valuation
This does not imply that the corporation has £15 million in the bank. It signifies that investors feel that the firm is worth at least £15 million, including the money received, and that they will receive a good return on their investment if and when there is a liquidation event.
The post-money valuation will follow a company after it gets a round of funding and will be seen as a vital measure of the company’s performance. If the startup’s post-money valuation rises following succeeding funding rounds, it is more likely to attract future investors and workers.
If, on the other hand, the post-money value falls from the prior round, this is known as a “down round,” and it may indicate that the firm is in trouble. Post-money appraisals can have major reputational ramifications in a world where everyone wants a ticket on the next rocket ship.
However, there are several practical reasons to know the post-money worth. To comprehend its use, we must first grasp the pre-money value, which is the inverse of the post-money valuation.
Pre-money vs post-money
A simple arithmetic calculation cannot calculate the pre-money valuation. This is due to the fact that it’s susceptible to interpretation and argument among investors and entrepreneurs.
The perceived worth of a company before any fresh outside investment or finance is known as the pre-money valuation. It’s what both investors and entrepreneurs believe a company is worth — and they frequently disagree.
In terms of timing, a pre-money valuation is calculated before any funds are raised, whereas a post-money value is calculated after the round has concluded.
Pre-money appraisals are especially difficult for early-stage investments since the firm may not have a lot of financial data to go on. As a result, comparable firms in the same sector, the size of the market, the founders and team, the level of interest in the sale, and a variety of other criteria influence investor valuations.
Investors should pay attention to the terminology founders use when discussing the valuation of their firm. If they say they want to raise £2 million at a post-money value of £6 million, what they really mean is that their pre-money valuation is £4 million.
However, if a founder raises £2 million at a £4 million post-money value, their pre-money worth is just £2 million.
This distinction has significant ramifications for investors’ ownership stake.
Ownership and Post-Money Valuation
A post-money valuation’s principal role is to calculate what proportion of the business the investor is acquiring.
When you know the post-money valuation, you may divide it by the amount you invested in the firm to calculate how much stock you’ll receive.
Amount Invested Post-Money Valuation = Equity Percentage
Returning to our earlier example, if you invested £500k in a firm with a post-money valuation of £6 , your equity ownership is 8.3 percent (£500k/£6 million= 8.3 percent).
Founders can also use the post-money value to assess how much of their ownership they need to dilute in order to obtain the necessary funds.
Assume you need to fund £2 million at a post-money valuation of £6 million and have 1 million shares outstanding. This implies that each share is worth £4 (£4M /1M). If you require extra £2 million and each of your shares is worth £4, you’ll need to issue another 500k shares (£4 x 500k = £2 million).
If you issued 500k new shares, your total number of outstanding shares would rise to 1.5 million. Selling those 500k shares entails selling a 33.33 percent part in your company (500k 1.5 million= 33.33 percent), reducing your ownership position to 66.67 percent.
If you know how much a firm raised and how much equity they had to sell, you can simply divide the investment amount by the equity holding to get the post-money valuation. So, if I sold 10% of my firm post-money to raise $2 million, the post-money valuation of my company would be $20 million ($2 million x 10% = $20 million).
It should be noted that a company’s individual share price is normally decided at the pre-money level. If my company’s pre-money value at seed was £3 million with 1 million shares outstanding, and it expanded to £9 million with 1.5 million shares outstanding at Series A, the share price would rise from £3 to £6 (£9 million / 1.5 million).
Whatever my post-money valuation is, it is still predicated on the original pre-money valuation.
The post-money valuation represents the company’s overall equity worth.
Use the following formula to get post-money value from pre-money share price:
Pre-Money Share Price x (Original Shares Outstanding + New Shares Issued) = Post-Money Value
So, if I had 1 million shares outstanding and issued another 500k at £3 per share, my post-money valuation would be £4.5 million (1 million+ 500k x £3).
Calculating the Post-Money Value
Knowing the post-money value can assist you in determining a variety of critical company KPIs. The difficulty is that post-money values are rarely as easy as a simple arithmetic calculation.
This is because entrepreneurs raise funds in a variety of ways, including stock financing, SAFEs, and convertible loans. When SAFEs or convertible loans are used, it might be because investors and founders couldn’t agree on a pre-money valuation, making it difficult to predict what the post-money price will be.
Valuation limits (a restriction on the price at which convertible debt can be converted to stock) and anti-dilution rules can complicate matters even further.
A proper post-money assessment might require some detective work, but it’s a vital criterion for estimating the worth of your investment.