Pre-money vs post-money valuation
Pre-money valuation is what the company is worth before the new money goes in. Post-money valuation is the same number plus the money raised. They differ by exactly the size of the round, and which one an investor means changes how much of your company they get.
The cap table we will use
Nine million shares, fully diluted, before anyone invests.
| Holder | Shares | Ownership |
|---|---|---|
| Founders | 8,100,000 | 90.0% |
| Option pool | 900,000 | 10.0% |
| Total | 9,000,000 | 100.0% |
An investor offers $2,000,000 at an $8,000,000 valuation. That sentence is incomplete, and the missing word is worth four and a half points of your company.
If $8 million is the pre-money valuation
Post-money is pre-money plus the investment, so $8,000,000 plus $2,000,000 is $10,000,000.
The price per share is the pre-money valuation divided by the shares already outstanding on a fully diluted basis:
$8,000,000 ÷ 9,000,000 = $0.888889 per share
The investor's $2,000,000 buys:
$2,000,000 ÷ $0.888889 = 2,250,000 shares
| Holder | Shares | Ownership |
|---|---|---|
| Founders | 8,100,000 | 72.0% |
| Option pool | 900,000 | 8.0% |
| Investor | 2,250,000 | 20.0% |
| Total | 11,250,000 | 100.0% |
The investor owns 20%, which is $2,000,000 divided by the $10,000,000 post-money. That is the check: an investor's percentage is always their cheque divided by the post-money valuation.
If $8 million is the post-money valuation
Now the $2,000,000 is inside the $8,000,000, so the pre-money is $8,000,000 minus $2,000,000, or $6,000,000.
$6,000,000 ÷ 9,000,000 = $0.666667 per share
$2,000,000 ÷ $0.666667 = 3,000,000 shares
| Holder | Shares | Ownership |
|---|---|---|
| Founders | 8,100,000 | 67.5% |
| Option pool | 900,000 | 7.5% |
| Investor | 3,000,000 | 25.0% |
| Total | 12,000,000 | 100.0% |
The investor owns 25%, which is $2,000,000 divided by the $8,000,000 post-money.
What it costs you
Same company, same cheque, same headline number.
| Founders keep | Investor gets | |
|---|---|---|
| $8M pre-money | 72.0% | 20.0% |
| $8M post-money | 67.5% | 25.0% |
Four and a half percentage points, decided by a word that can go unsaid in a first conversation.
The gap is not fixed, and it does not scale with the cheque. It grows faster than the cheque does. Against the same $8,000,000 headline:
| Cheque | Founders keep, pre | Founders keep, post | Gap |
|---|---|---|---|
| $200,000 | 87.805% | 87.750% | 0.055 pts |
| $2,000,000 | 72.000% | 67.500% | 4.500 pts |
| $4,000,000 | 60.000% | 45.000% | 15.000 pts |
A cheque a tenth the size opens a gap one eightieth as wide. A cheque twice the size opens one more than three times as wide. The bigger the round relative to the company, the more the missing word costs you.
What to check in your own documents
- Does the term sheet say pre-money or post-money? If it says neither, it is not yet an offer you can evaluate.
- What share count is the price being divided by? Check whether the existing option pool is inside the denominator, because it changes the price per share. If the pool is being expanded as part of the deal, ask where the expansion comes from: taken out of the pre-money, it dilutes you further and does not dilute the incoming investor. That is a separate calculation and it is worth doing before you agree to a valuation.
- Do the percentages in the term sheet reconcile? Divide the cheque by the post-money. If the answer is not the percentage on the page, something else is in the denominator and you should find out what.
Run it on your own numbers
The arithmetic above is the whole method, and you can do it in a spreadsheet. What is harder is doing it against your actual cap table, with your actual pool, and then seeing what the round after this one does to the same numbers.
Promythia models both, on the cap table you enter. Create a free account and put your real numbers in.
Promythia offers market and strategy guidance. It is not legal or financial advice.