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:
