As you might be able to guess from the name, post-money valuation is the estimated monetary value of a business after a round of financing or capital injections.
Read on for a full rundown of post-money valuation, so that you’re better equipped the next time you’re negotiating with investors.
What is Post-Money Valuation?
A post-money valuation is a company’s estimated worth after a round of funding. This is a repeated process that usually takes place after every round of funding a company goes through—whether it’s one round or seven. Each funding round results in a new post-money valuation.
Previous post-money valuations can be great tools for investors. They can use a company’s historical valuations to keep tabs on its progress and make rough predictions about its trajectory.
Post-money valuations also allow founders to benchmark the success of their company. After each round of funding, they can compare their new post-money valuation against the last one. If the number is higher, it generally means the company is doing well (or at least attracting more investor interest). If the number is lower (referred to as a “down round”), it might be a sign that the company is losing steam and needs to change things up.
Pre-Money Vs. Post-Money Valuation
A post-money valuation happens after a company takes on outside investment. A pre-money valuation happens before it takes on any outside investment.
When determining a company’s pre-money valuation, investors and founders decide what they believe the monetary value of the company is. It can be difficult to determine an accurate pre-money valuation for a company. Investors and founders often disagree over the company’s value, and without the data a funding round provides, it’s usually impossible to fully back up claims.
Because of this, pre-money valuations are often based on data from similar businesses that have recently raised funding. This data can come from research reports, online tools like PitchBook, or the investors’ and founders’ own networks.
How To Calculate Post-Money Valuation
Calculating the post-money valuation of a company is very simple—and there are two ways to go about it:
= Investment ÷ % of Equity Sold
= Investment + Pre-Money Valuation
For example, let’s say a company has a pre-money valuation of $4 million with 400,000 shares. In the company’s first funding round, they raise $1 million by selling 100,000 new shares—or 20% equity in the company.
According to the first formula, we can divide the investment ($1 million) by the percent of equity sold (20%) to get the post-money valuation ($5 million).
According to the second formula, we can add the investment ($1 million) to the pre-money valuation ($4 million) to get the post-money valuation ($5 million).
Note: This valuation doesn’t mean the company has $5 million in the bank. It means that investors believe the company’s assets would be worth $5 million if everything was liquidated.
Post-Money Valuation Is Important for Founders and Investors
A post-money valuation is an important concept for both founders and investors to understand, because they impact everything from loan terms to finding further investment.
If you’re looking for more advice about running a startup, Growth Mentor can connect you with the perfect mentor or coach. Members get unlimited 1-on-1 calls, so you’re free to unlock your full potential!