Post-money valuation
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A post-money valuation is a term used in private equity or venture capital which refers to the valuation of a company or asset immediately after an investment or financing.
External investors, such as venture capitalists and angel investors, will use a pre-money valuation to determine how much equity to demand in return for their cash injection to an entrepreneur and his/her startup company. The implied post-money valuation is calculated as the dollar amount of investment divided by the equity stake gained in an investment.
[edit] Example
If an investor makes a $100 million investment in a company in return for twenty percent of the company's equity, the implied post-money valuation is $500 million. To calculate the pre-money valuation, the amount of the investment is subtracted from the post-money valuation. In this case, the implied pre-money valuation is $400 million.
This basic example illustrates the general concept. However, in actual, real-life scenarios, the calculation of post-money valuation can be more complicated -- because the capital structure of companies often includes convertable loans, warrants, and option-based management incentive schemes.
Strictly speaking, the calculation is the price paid per share multiplied by the total number of shares existing after the investment -- i.e., it takes into account the number of shares arising from the conversion of loans, exercise of in-the-money warrants, and any in-the-money options. Thus it is important to confirm that the number is a fully diluted and fully converted post-money valuation.
In this scenario, the pre-money valuation should be calculated as the post-money valuation minus the total money coming into the company -- not only from the purchase of shares, but also from the conversion of loans, the nominal interest, and the money paid to exercise in-the-money options and warrants.
Example 2: Consider a company with 1,000,000 shares, a convertable loan note for $1,000,000 converting at 75% of the next round price, warrants for 200,000 shares at $10 a share, and a granted ESOP of 200,000 shares at $4 per share. The company receives an offer to invest $8,000,000 at $8 per share.
The post-money valuation is equal to $8 times the number of shares existing after the transaction -- in this case, 2,366,667 shares. This figure includes the original 1,000,000 shares, plus 1,000,000 shares from new investment, plus 166,667 shares from the loan conversion ($1,000,000 divided by 75% of the next investment round price of $8, or $1,000,000 / (.75 * 8) ), plus 200,000 shares from in-the-money options. The fully converted, fully diluted post-money valuation in this example is $18,933,336.
The pre-money valuation would be $9,133,336 -- calculated by taking the post-money valuation of $18,933,336 and subtracting the $8,000,000 of new investment, as well as $1,000,000 for the loan conversion and $800,000 from the exercise of the warrants.