Hong Life CalculatorsUnderstanding the pre-money and post-money valuation — concept and principle
When an investor puts money into a startup in exchange for a percentage of the company, the deal implies a price for the whole business. The post-money valuation is the company's value immediately after the investment; the pre-money valuation is its value just before. Founders, angels and venture investors use this calculation to check what a term sheet really says and to compare offers. It works with any currency; the default is US dollars.
How it is calculated
With investment I and equity sold e (in %):
- Post-money valuation = I ÷ (e ÷ 100)
- Pre-money valuation = post-money − I
The equity percentage is measured on a fully diluted, post-investment basis, meaning the investor's shares divided by all shares and share equivalents after the round.
The principle
If an investor pays I for e% of the company after the round, then e% of the post-money value equals I, so post-money = I ÷ e. The new cash becomes part of the company, which is why post-money is simply pre-money plus the investment. Dividing pre-money by the number of fully diluted shares before the round gives the price per share the investor pays.
Worked example
- Inputs: investment $3,000,000 for 20% equity.
- Post-money: 3,000,000 ÷ 0.20 = $15,000,000.00.
- Pre-money: 15,000,000 − 3,000,000 = $12,000,000.00.
- Check: 3,000,000 ÷ 15,000,000 = 20%. Existing holders keep 80%, worth $12,000,000 on paper.
How to read the result
A higher pre-money valuation means founders give up less ownership for the same money. But the headline number is only part of the deal: the size of an option pool created before the round, liquidation preferences, anti-dilution terms and convertible notes or SAFEs that convert in the round can all change what founders actually keep. Two offers with the same valuation can be very different once those terms are compared.
Common mistakes
- Treating an offer quoted as "pre-money" as post-money, or the reverse; always ask which one is meant.
- Forgetting that a new or enlarged option pool counted in the pre-money lowers the effective pre-money value for founders.
- Ignoring SAFEs or notes that convert at the round and dilute everyone.
- Treating the valuation as cash value; it is a negotiated price for minority shares.
Frequently asked questions
How do I get the price per share?
Divide the pre-money valuation by the fully diluted shares outstanding before the round. The investor's share count is the investment divided by that price.
Is a higher valuation always better for founders?
Not always. A valuation that the company cannot grow into can make the next round harder, and tough terms can offset a high number.
What is a post-money SAFE?
A SAFE whose ownership is calculated on the post-money basis, so the holder's percentage is fixed by the valuation cap, regardless of other SAFEs.
Sources: Brad Feld and Jason Mendelson, Venture Deals, Wiley · Y Combinator, Post-Money SAFE user guide