Pre-money Valuation and Post-money Valuation are the most common terms for startups who are willing to raise funds, especially through VC funding.

While raising funds startups are in hurry to get cheques signed and hence neglect most of the terms. Pre-money and post-money are a few of them. The question is why it is important to know and how it will affect business?

While deciding the valuation of a company both entrepreneur and investor have a different perspective. Investors always look for lower valuation so they can get maximum shares in lower amounts and in contrast entrepreneurs want s higher valuation with minimum liquidation of ownership.

Difference between Pre-money and Post-money Valuation.

• The timing of valuation is the biggest difference between Pre-money and post-money.

• Pre-money valuation means the value of a company where external funding or the latest round of funding not including. i.e Pre-money valuation denotes the exact worth of a company before raising funds.

• Post-money valuation includes outside financing or the latest capital raised.

It is very important to know which type of method to be selected while raising funds.

Example:  For company entrepreneurs and investors are agreed on Rs.100,00,000 as the worth of a company and the investor wants to invest Rs.25,00,000.

In the above example, if the investor agrees on a pre-money valuation of Rs.1,00,00,000 then the total worth of the company will be Rs.1,25,00,000 and the founder’s percentage will be 80%.

In the second case if the investor says Rs. 1,00,00,000 is a post-money valuation then the total worth of a company will be Rs. 1,00,00,000 and then the percentage of founders will be reduced to 75 %. i.e will get 5% less equity. It looks very small amount at the primary level but it can cost in crores when the company goes public.

How to calculate post-money valuation?

The formula for calculation of post-money Valuation

Post-Money Valuation= Investment amount / Percentage of share investor receive

If an investment of Rs. 5 crores is done at 10% equity then post-money valuation will be Rs.50 crore.

Post money Valuation= Rs. 5 crore / 10% = 50 crore

Companies valuation will be Rs. 50 crore only after receiving 5 crore funding and not before that.

How to calculate pre-money valuation?

Pre-money valuation is worth of the company before receiving any funding. It is required to calculate post-money valuation first.

The formula for calculating pre-money valuation

Pre-money valuation = Post money Valuation- Investment amount

In the above example, the pre-money valuation will be Rs. 45 crore.

Rs.45 crore = Rs.50 crore – Rs. 5 crore

Pre-money valuation is a more famous method as compared to post-money valuation. As psychologically investors prefer negotiating Rs. 5 crore series A round at Rs 10 crore (pre-money valuation) instead of Rs. 15 crores (post-money valuation).