Hi, I’m Chris Walton, author of this guide and CEO of Eton Venture Services.
I’ve spent much of my career working as a corporate transactional lawyer at Gunderson Dettmer, becoming an expert in tax law & venture financing. Since starting Eton, I’ve completed thousands of business valuations for companies of all sizes.
Read my full bio here.
If you’re a startup founder currently raising funds, you might be confused about pre vs post-money valuations.
What does it mean when an investor says they want 20% of your company based on a pre-money valuation? Or when they offer $1 million based on a $5 million post-money valuation? 🥴
These terms can be confusing, but it’s essential to understand them so you can negotiate better deals with investors and decide whether to accept an offer.
I’ve spent the past 15 years valuing startups alongside VCs and founders, so I know the valuation process inside out.
In this article, I’ll explain the key differences between pre vs post-money valuations in simple language and give you a free tool to calculate each.
Key Takeaways
Both pre and post-money valuation measure the value of your startup, but the key difference is in the timing.
Pre-money valuation is the value of your startup before new money is injected, while post-money valuation is the value of your company after an investment has been made.
Let’s look at an example to understand this further:
Pre-Money Valuation: Suppose your startup is valued at $8M before any new investment.
New Investment: An investor might say they want 20% of your company based on a pre-money valuation–which means they want to own 20% of the total company value before the investment.
This means they’ll make an investment of 20% x $8M = $1.6M
Post-Money Valuation: The new total valuation of your company is now $9.6M ($8M pre-money + $1.6M investment).
Ownership Impact: The investor now owns 20% of the company and you and your other shareholders will own the rest.
Here’s a complete breakdown of pre- vs post-money valuation:
Pre-Money Valuation | Post-Money Valuation | |
Definition | The value of your startup before it gets any new investment. | The valuation of your company after new investment is included. |
Why It’s Useful for Startup Founders | Helps you understand the value of your company based on current assets, revenue, and potential. | Helps you know the value of your company after new investments are made, influencing ownership percentages and future valuations. |
Impact on Company/Funding | Determines the percentage of ownership new investors will receive. A higher pre-money valuation means you give away less equity for the same amount of investment. | Affects the dilution of ownership for you and other existing shareholders. A higher post-money valuation can make it easier for you to raise future funds but means you hold a smaller percentage of the company. |
When & Why Investors Use It | Used during initial investment discussions and negotiations to determine the value of the company before any new funds are added. This helps investors understand what portion of the company they will own once the investment is made. | Used after investment terms have been agreed upon and the investment has been made. Investors use this to determine the exact ownership percentage they have acquired. It also helps in evaluating overall ROI in future funding rounds and exit scenarios. |
How to Calculate | Heavily depends on negotiations between the founder and the investors. Typically, experts use these three methods to agree on a baseline value:
(More on each method later.) | Usually by adding the investment amount to the pre-money valuation. Formula: Post-Money Valuation = Pre-Money Valuation + New Investment |
💡 Free Download: Before going into detail, here’s a simple spreadsheet you can use to calculate valuations and ownership percentages. Simply copy and start using it right away. No email required.
The spreadsheet comes in two parts:
It’s important to note that real-life valuations are much more complicated and nuanced, and the risk of getting it wrong is massive.
This is why I I recommend folks work with a trusted startup valuation provider to get a fast, reliable, and court-defensible valuation report.
Now, let’s get into the details.
Startup valuations are tricky as there is little to no past financial data or revenue to base valuations on. Traditional valuation methods like Discounted Cash Flow and Revenue Multiples don’t work, especially if you’re pre-seed.
Instead, pre-money valuations depend a lot on negotiations between the investors and founders considering factors like market opportunity, team expertise, and product potential.
However, before the negotiations take place, investors usually estimate the value of a startup using these three methods:
This method values a startup by comparing it to similar companies recently valued or sold.
Here’s the formula:
Valuation=Adjusted Multiple×Your Metric (e.g., users)
An adjusted multiple takes into account differences between your startup and comparable companies, such as technology, market conditions, or team expertise.
For example, let’s say, similar companies are valued at $150 per user.
If your startup’s technology is more advanced, you might adjust the multiple to $160 per user.
Your startup has 10,000 users, the valuation would be:
Valuation=160×10,000=$1,600,000
This method estimates the future value of the company and works backward to determine its present value.
Its formula is as follows:
Post-money Valuation=Future Exit Value / Expected ROI
Pre-money Valuation=Post-money Valuation−Investment Amount
For example, if the VC is investing $5 million, and the post-money valuation is calculated at $20 million, the pre-money valuation is:
Pre-money Valuation = Post-money Valuation − Investment Amount
Pre-money Valuation = $20M − $5M = $15M
📖 Read more: Venture Capital Valuation: 7 VC Valuation Methods & the Process
This method assigns values to key aspects of a startup.
For example, if your startup has:
Total Valuation: 400,000+300,000+500,000+200,000+400,000=$1,800,000400,000
For a detailed breakdown of each method, check out our comprehensive guide on how to value a startup company with no revenue.
The easiest way to calculate post-money valuation is to add the new investment amount to the pre-money valuation.
This is a more straightforward process as investors and founders have already agreed upon the initial company value and investment amount (there’s less pressure to get it right).
Here’s the formula:
Post-Money Valuation = Pre-Money Valuation + New Investment
For example:
Post-Money Valuation = 10 million + 2 million = 12 million
However, when a new investor puts money into a startup, the founders and current shareholders own a smaller part of the company. This is called dilution.
Here’s the formula to calculate ownership %:
For example:
Here, the founder’s shares represent 70% of the initial ownership because there are other pre-existing shareholders (e.g., co-founders, early employees, or angel investors).
But their ownership will be further reduced to 58% after new capital is injected.
💡 Important Note: Ownership-dilution isn’t necessarily a bad thing.
While you’re giving up a part of your company, the capital and resources you get from investors can significantly increase your company’s value—making your smaller share worth more in the long run.
Brett Fox, startup CEO coach who has raised over $ 100 million in venture capital equity funding says, “Keep your eye on the prize, and the prize is raising more money so your company can go on.”
Convertible notes and SAFEs (Simple Agreements for Future Equity) are popular instruments for early-stage financing. These tools significantly impact valuations through their unique structures.
Convertible notes are short-term loans that turn into equity later, usually when the company gets more funding. This conversion often happens at a discount or with a valuation cap.
For example, a startup issues a convertible note with a $1 million valuation cap and a 20% discount. Later, if it raises money at a $2 million valuation, note holders can convert their debt to equity at the lower valuation cap. This gives them more equity for their investment.
Convertible notes can delay the company’s valuation until later funding rounds. “Early-stage investors need an incentive for taking a chance on your company when you don’t have any real metrics to prove your reliability to them yet. Discounts and valuation caps do that,” explains Carta.
However, if the company grows a lot before the conversion, it can dilute the founders’ ownership.
SAFEs are like convertible notes but are not loans and do not earn interest. They give investors the right to buy equity in a future funding round. SAFEs can also include valuation caps and discounts.
For example, an investor might buy a SAFE with a $2 million valuation cap. If the company later raises funds at a $4 million valuation, the SAFE converts at the $2 million cap, giving the investor more shares.
SAFEs make raising money easier and quicker by simplifying negotiations and paperwork. This is good for early-stage startups.
However, when convertible notes or SAFEs convert at a lower valuation cap, more shares are issued. This reduces the ownership percentages of existing shareholders and new investors more than expected.
Other factors affecting pre-money valuations include:
Post-money valuations depend on the investment amount, which is influenced by:
📚 You might also like: SaaS Valuation: How to Value Your SaaS Company Like a VC
Have more questions about pre vs post-money valuation or just need a recap?
Here are my answers:
Pre-money valuation is the estimated value of your company before receiving new investment funds. It helps determine how much equity investors will get for their money.
Post-money valuation is the value of your company after the investment has been added. It shows the total value of the company with the new funds included and helps calculate the investors’ ownership percentage.
Essentially, pre-money valuation sets the baseline, and post-money valuation reflects the company’s worth after the investment.
It depends. Some investors will ask for ownership based on the pre-money valuation amount, while others will use the post-money valuation.
Here are some reasons why investors might prefer on or the other:
Pre-Money Valuation | Post-Money Valuation |
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A Simple Agreement for Future Equity (SAFE) is an agreement used in startup financing that provides an investor the right to purchase shares in a future equity round.
Here’s a breakdown of what SAFE pre and post-money valuation means:
SAFE Pre-Money Valuation | SAFE Post-Money Valuation | |
Definition | Valuation of the company before the new SAFE investment is included. | Valuation of the company after the new SAFE investment is included. |
Usage | Establishes company value before new funds, determining equity once SAFE converts | Shows company value including new funds, simplifying ownership percentage calculation |
Example | Company valued at $5 million pre-money; $1 million SAFE investment. | Company valued at $6 million post-money after $1 million SAFE investment. |
Impact on Negotiation | Can lead to complex calculations and unexpected dilution in future rounds. | Provides transparency, making ownership stakes clear for both founders and investors. |
Schedule a free consultation meeting to discuss your valuation needs.
Chris co-founded Eton Venture Services in 2010 to provide mission-critical valuations to venture-based companies. He works closely with each client’s leadership team, board of directors, internal / external counsel, and independent auditor to develop detailed financial models and create accurate, audit-proof valuations.
