The valuation of a startup is a measure of how much the startup is worth to an investor. This is at a particular point in the life cycle of the startup, at a particular point in chronological time.
Post-money valuation for a startup is a venture capital concept for the valuation of a startup, just after an investment is made. The post-money valuation is the sum of the pre-money valuation plus the amount of the just completed investment.
Most startups obtain one or two seed rounds of investment, followed by several rounds of venture capital investment (referred to as A Round, B Round, C Round, etc.), before their ultimate financial exit. Pre-money and post-money valuations are calculated for each round. Investment offers from investors are expressed in terms of both pre-money and post-money valuations.
Example of a post-money valuation
In the event that a startup is worth $1 million (pre-money) and then an investor makes an investment of $250,000. The post-money valuation of the company will be $1,250,000. After that investment the investor owns 20% of the startup.
This is a simple example. In real-life situations, the calculation of post-money valuation might be quite complicated. The financial situation may include convertible note loans, warrants, option-based management incentive programs and etc.
Notes
One needs to be sure one understands exactly how a valuation was calculated; how did it take into consideration the amount of shares arising from the conversion of loans, activity of any in-the-money warrants, and also any in-the-money options. It is advisable to verify that the number is a totally diluted and ultimately converted post-money valuation.
In a complex situation, 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 equity, and from the conversion of loans, but also the cash paid to exercise in-the-money options and warrants.
References
- Please see our blog post Pre-Money Valuation For a Startup
- Post-Money Valuation
- What is a Pre-money and Post-money Valuation?
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