Pre-Money vs. Post-Money Valuation

When a company decides that it must raise capital, a key question that must be answered is how much the company is worth. For example, if the business needs $500,000 to get started and/or grow, how much of the equity in that company should $500,000 command? Once this question is answered, the company will go out and try to find investors. When doing so, a key question often arises as to whether the valuation is "pre-money" or "post-money."

"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: (1) a $1 million valuation, and (2) a $250,000 equity investment. In this case, the company may offer the investor 250 shares for $250,000. Immediately there can be a disagreement. 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.

The critical issue was whether the agreed value of $1 million to be assigned to the company was prior to or after the investor's contribution of cash (pre-money) or post-money.

In the above case, a pre-money valuation of $1 million and a post-money valuation of $1.25 million were equivalent. Because mixing up the terms could significantly increase the cost of capital raised, companies must be sure to understand the two metrics and agree with investors to the metric that raises them the capital at the appropriate price.

Since its inception, Growthink Business Plans has developed over 200 business plans. Growthink clients have collectively raised over $750 million in financing, launched numerous new product and service lines and gained competitive advantage and market share. Growthink has become the firm of choice for venture capital firms, angel investors, corporations and entrepreneurs in the know. For more information please visit http://www.growthink.com or download our free Business Plan Guide.

---

Two Types of Business Plan Executive Summaries

Companies seeking capital often ask how long the Executive Summary... Read More

Are You An Entrepreneur?

With all the buzz about everybody being an entrepreneur these... Read More

Entrepreneurial Ongoing Education Advice

I would like to give some advice to all the... Read More

5 Habits Of Successful Entrepreneurs

Habits get a bum rap. When you think about your... Read More

Entrepreneurs: Benefits vs. Features-Know the Difference!

Entrepreneurs know their business. They know their product, their service.... Read More

Entrepreneurs Just Get Better With Age

Q: I'm thinking about starting a business after I retire... Read More

The Ideal Length of Your Business Plan

How long should a business plan be? A business plan... Read More

Curb Your Enthusiasm

Isn't enthusiasm a good thing? Aren't we urged to be... Read More

The Myth of Undercapitalization - Six Ways Entrepreneurs Achieve Success in Spite of Start-Up Money

This year more than 17 million people will become entrepreneurs,... Read More

10 Tips for Would-be Entrepreneurs

Every evening as the sun sets beyond the mangroves that... Read More

An Entrepreneur Is

An entrepreneur is an innovator. She sees a need in... Read More

Franchises - Emotional Fulfillment - Control Your Destiny

Does A Franchise Meet Your Needs?When you think of becoming... Read More

Business Development: The Basic Ingredients

Cooking isn't much different than building a business. You have... Read More

Top Ten Ways to Increase Your Profitability

1) Go back to basics. Take a couple of steps... Read More

Message to Prospective Franchisees for Franchisors

Many franchise companies fail to send the proper message to... Read More

Before the Business Plan

Purveyors of conventional wisdom would have you believe that the... Read More

Secrets of My Favorite Government Auction

I love bargains. And there's no better place to find... Read More

Youve Found Your Guru, Now What?

In my last article, "Follow That Guru", I told you... Read More

Entrepreneurs Ask: As a Novice Entrepreneur, How Can I Feel Less Overwhelmed?

Great question! Overwhelm is very common even among the most... Read More

Success Secret - How To Find Million Dollar Opportunities

They're really are powerful million dollar opportunites everywhere.Ok, let me... Read More

Oil Change Guys History; Part IV

One trait of franchisors and something you will find in... Read More

Franchises - A Proven Business System

Franchises offer the first time business owner a proven and... Read More

Franchises - Emotional Fulfillment - The Challenge

Does A Franchise Meet Your Needs?Do you look forward to... Read More

For Business SUCCESS... Listen To The Voices of Experience

Discover the pitfalls of owning your own business BEFORE... [you... Read More

Cut to the Quick - What is an Entrepreneur? The Inside Story

Enjoying the title of entrepreneur is a hollow feeling.If you... Read More

Hearing That Entrepreneurial Voice?

Women business owners are our only clients, so naturally we... Read More

Electronic Tools for Entrepreneurial Success

"Half of any job is having the right tool" was... Read More

Do You Have What It Takes?

I think it's fair to say that not everyone is... Read More

Entrepreneurs - 9 Top Mistakes to Avoid

1. Isolating Yourself When setting up a business, you can... Read More

Empathy - Not Business Plans - Key to Your Home Based Business Success - Do You Have Empathy?

EMPATHY is a Natural Talent, you were born with it... Read More

Solving the Million Dollar Mystery: 4 Steps To Create A Turn-Key Business

You're a smart, hardworking entrepreneur, and you're moving fast. You... Read More

From Employee to Entrepreneur: Taking the Plunge

Before you decide whether or not running your own business... Read More

Dream It, Create It, Become It! Design a Dream Board

Have you ever heard of "Dream Boards" or "Treasure Maps"?... Read More