Post-money valuation refers to a company’s implied value after raising capital. The term is typically used in angel investing and venture capital parlance.
Post-money valuation is the summation of pre-money valuation and the value of capital raised from outside.
Pre-money vs. post-money valuation
Pre-money valuation is the company’s value before a new round of funding. There are various ways to arrive at a company’s pre-money valuation. However, there is no single formula used to value a company. The company and the venture capitalist (VC) will come up with their own valuation for the company based on fundamental factors like financial strength and competitive advantage.
Post-money valuation is the sum of the pre-money valuation and the capital raised. The difference is simple to understand, but critical.
For example, if an investor proposes that they have valued the company at $10M and want to move forward with investing $5M, you need to know if the $10M they are referring to is pre-money or post-money.
If the $10M valuation is pre-money, the investor will own 33.33% of the company after the investment:
If the $10M valuation is post-money, the investor will own 50% of the company after the investment:
Post-money valuation example
Innovative Inc. is about to raise $1.5M by selling a 10% stake to a VC. Innovative Inc.’s pre-money valuation as agreed with the VC is $13.5M and it has 4.5M shares outstanding. Innovative Inc. issues 500,000 shares to bring the total outstanding shares to 5M (i.e., 4.5M ÷ 90%). In this case, the post-money valuation is calculated as:
Alternatively, it’s also possible to compute the implied post-money value because we know how much of the company the investor wants to buy. Since the investor is ready to pay $1.5M for 10% of the company, the implied post-money valuation of the company could be calculated as:
Note that the per-share value pre-money and post-money will remain the same: