- Pre-money valuation = $10M
- Post-money valuation = $10M + $2M (investment) = $12M
Pre-money valuation: It's how much your company is worth before receiving investment or financing. In other words, the value of your company before funds are invested by angel investors or venture capital companies.
Post-money valuation: It's the valuation of your company after you receive investment from angel investors or venture capitalists. Basically it's calculated by adding the total amount of investments raised to the pre-money valuation of your company.
Let's say you have a startup company, and investors invest $2M into your business. If the value of your company was $10M before an investment, then:
So, after raising capital, your startup will be worth $12M
Understanding Ownership Percentage:
Using the above example, if an investor is providing $2 million at a $10 million pre-money valuation:
Ownership percentage = investment / post-money valuation
⟹ $2 million / $10 million = 20%
This means the investor would own 20% of the company after the investment, while the existing shareholders would own the remaining 80%.
Why It Matters:
Understanding the difference between pre-money and post-money valuation is crucial for both startups and investors. For startups, it helps in understanding how much of the company they are giving away in exchange for funding. For investors, it helps in determining the worth of their investment and the stake they get in return.