Pre-Money vs. Post-Money Valuation Explained

Greg Miaskiewiczby Greg Miaskiewicz • 7 min readpublished November 16, 2021

Your pre-money value refers to your company’s agreed-upon value right before raising funds, while its post-money value refers to what the company’s worth will be immediately after.

In this article you will find information on:

  • The differences between pre-money & post-money valuation
  • How to calculate pre-money valuation
  • How to calculate post-money valuation
  • How SAFEs and convertible notes influence valuation

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Pre-money vs. post-money valuation

Here’s a simple equation for understanding pre-money vs. post-money valuation:

Post-money valuation = Pre-money valuation + Size of investment

Both are important when calculating the value of the business: you can’t have one without the other. But pre-money valuation of a company has a bigger effect on ownership percentages.

A simple example pre-money vs. post-money valuation

Agreeing to a pre-money valuation of $1,000,000 will result in a drastically different ownership share than agreeing to a post-money valuation of $1,000,000. Why is that? Let’s take a closer look at both of these hypothetical valuations.

If you agree to a pre-money valuation of $1,000,000 (let’s call this case #1) and a VC wants to invest $200,000 in your company, that means the investor’s $200,000 will buy them 20% of the company, with a post-money valuation of $1,200,000.

But that same investment will buy them 25% if they agree to a post-money valuation of $1,000,000 (case #2). Why is that?

Let’s take the equation from before and rearrange it a bit:

Pre-money valuation = Post-money valuation - Size of investment

Notice how agreeing to a post-money valuation of $1,000,000 after an investment of $200,000 now means you’re agreeing to a pre-money valuation of $800,000.

In case #1, the investor was buying a $200,000 slice of a company with a pre-money valuation of $1,000,000, or 20%.

But in case #2, the investor gets a $200,000 piece of a company with a pre-money valuation of just $800,000, or 25%.

Calculating pre-money valuation

We’ve established that the percentage of the company you have to give up during an investment round comes down to its pre-money valuation, and that the higher the pre-money valuation, the less of your company you have to give up.

Coming up with a pre-money valuation can be tricky though—often it’s as much about formulas and ratios as it is about you and your investors’ opinions about the company, the market it's participating in, and what the chances are of it succeeding in the future.

The pre-money valuation you end up agreeing on could hinge on any number of different factors, including:

  • What stage in the startup lifecycle your company finds itself in
  • How many other VCs are vying to invest in the business
  • How experienced and established you and your founders are in the industry
  • How other similar companies are doing, and how attractive the market you’re participating in looks to investors as a whole
  • The investing style and habits of the VCs themselves
  • Cash flow, expenditures, revenue, sales, clicks, engagements, pageviews, users, subscribers, listens, upvotes, or any number of other metrics you and your VC decide are important
  • How the economy is doing as a whole

Calculating post-money valuation

How you calculate your post-money valuation will depend on which variables you already have on hand. Remember the formula from earlier?

Post-money valuation = Pre-money valuation + Size of investment

This is one way we can calculate post-money: simply take pre-money, and add the size of the investment. Simple.

Another way to calculate post-money valuation is to look at the share price you agree to sell at, which is just the dollar amount of the investment divided by the number of shares that investment buys the investor:

Share price = New investment amount / # of new shares received

Your share price is also equal to your total post-money valuation divided by the total # of shares post-investment, which subbed into the above formula gives us the following:

Post-money valuation / total # of shares post-investment = New investment amount / # of new shares received

Rearranged slightly, this formula becomes:

Post-money valuation = (New investment amount / # of new shares received) * total # of shares post-investment

Convertible notes

Convertible notes start out as loans that then ‘convert’ into equity when your company raises money in another funding round. For early and angel investors, it’s essentially like reserving a spot in your first ‘real’ funding round, and it means you can leave the valuation question for another day.

The problem is that adding convertible notes into the mix can greatly complicate the math involved in calculating dilution, and can turn the issue into a three-way tug of war.

That’s because the method you, your convertible note holders and your series A investors use to determine share prices will dilute each of your resulting ownership shares differently. Under some methods, founders get diluted the most, under others the convertible note holders do, and under others VCs do. At the end of the day, someone has to compromise.

Pre-money and post-money SAFEs

Like convertible notes, a Simple Agreement For Future Equity (SAFE) is another way for startups to raise early-stage money while kicking the valuation question down the road.

Pioneered by Silicon Valley’s Y Combinator accelerator in 2013, the pre-money SAFE is just a streamlined convertible note that involves a lot less legal and paperwork. Some investors might prefer one over the other, but they essentially function the same way.

In 2018, after realizing that more companies were raising larger SAFEs, Y Combinator debuted an updated “post-money” SAFE intended to stand more on its own feet as a separate round of funding, rather than a bridge to future rounds like a series A.

As Y Combinator puts it, the biggest advantage of the post-money SAFE is that the amount of ownership sold is immediately transparent and calculable for both the founder and the investor. That wasn’t always possible with the pre-money SAFE, and founders didn’t always understand how much dilution was going to be caused by each SAFE they issued.

For a more in-depth discussion on the differences between the old and the new SAFE, see our excellent blog post on the topic.

Summary

  • Pre-money valuation is how much your company is worth before the investor’s money hits your bank account, while post-money valuation is how much it’s worth after.
  • The valuation you agree to can have an impact on the resulting ownership share.
  • Convertible notes and pre-money SAFEs are a quick and simple way to raise funds prior to money rounds (Series A, B, C etc.)
  • Since 2018, post-money SAFEs have made it easier for founders and investors to quickly and reliably close deals with confidence.

Further reading

When it comes time to start issuing convertible notes and SAFEs to investors, the first thing they’ll usually ask for is your capitalization table, which tracks who owns equity in the company—employees, co-founders, other investors, etc. For a detailed rundown on cap tables, check out our Ultimate Guide to Cap Tables for Startup Founders.

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Greg Miaskiewicz

Security expert, product designer & serial entrepreneur. Sold previous startup to Integral Ad Science in 2016, where he led a fraud R&D team leading up to a $850M+ purchase by Vista in 2018.

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