Pre-money valuation

There are many different methods for valuing a business, but basic formulae include:

${\displaystyle {\text{Post-money valuation}}={\text{New investment}}\,\cdot \,{\frac {\text{Total post investment shares outstanding}}{\text{Shares issued for new investment}}}}$

${\displaystyle {\text{Pre-money valuation}}={\text{Post-money valuation}}-{\text{Investment amount}}}$

Shareholders of Widgets, Inc. own 100 shares, which is 100% of equity. If an investor makes a $10 million investment (Round A) into Widgets, Inc. in return for 20 newly issued shares, the post-money valuation of the company will be $60 million. ($10 million * (120 shares / 20 shares) = $60 million).

The pre-money valuation in this case will be $50 million ($60 million - $10 million). To calculate the value of the shares, we can divide the Post-Money Valuation by the total number of shares after the financing round. $60 million / 120 shares = $500,000 per share.

The initial shareholders dilute their ownership from 100% to 83.33%, where equity stake is calculated by dividing the number of shares owned by the total number of shares (100 shares/120 total shares).

Series A Cap table

Let's assume that the same Widgets, Inc. gets the second round of financing, Round B. A new investor agrees to make a $20 million investment for 30 newly issued shares. If you follow the example above, it has 120 shares outstanding, with 30 newly issued shares. The total of shares after Round B financing will be 150. The Post-money valuation is $20 million * (150 / 30) = $100 million.

The Pre-money valuation is equal to the Post-money valuation minus the investment amount – in this case, $80 million ( $100 million - $20 million).

Using this, we can calculate how much each share is worth by dividing the Post-money valuation by the total number of shares. $100 million / 150 shares = $666,66.66 / share

The initial shareholders further dilute their ownership to 100/150 = 66.67%.

Series B Cap table

Note that for every financing round, this dilutes the ownership of the entrepreneur and any previous investors.

Financing rounds can be categorized into three types: Up round, down round, or flat round. A financing round will be considered an up round when the share price of the round is higher than the share price before the financing round. In an up round, the post-money value will be higher than the pre-money value. If the share price of the round is lower than the share price before the financing round, this is considered a down round. In down rounds, the post-money valuation is lower than the pre-money valuation. A flat round is when the pre-money valuation and the post-money valuation do not change.

In the examples above, the Series B funding was an up- round investment because the post-money valuation ($80 million) was higher than the pre-money valuation ($60 million).

A successful growing company usually receives a series of up rounds until it is launched on the stock market, sold, or merged. Down rounds are painful events for initial shareholders and founders, as they cause substantial ownership dilution and may damage the company's reputation. Down rounds were common during the dot-com crash of 2000–2001.

• Post-money valuation
• Capitalization table
• Accretion/dilution analysis