Premoney Vs Postmoney Valuation: What Is The Difference?

This pre-money isn’t static. It can change as you go through each level of Series A, B, and C financing, whether the investment is from public market sources or private investments. Adding investments to a company increases its equity valuation because it has been given a cash infusion.

How is Premoney vs Postmoney Valuation Calculated?

There is no reasonable way to evaluate an early startup. This is because seed-stage companies often have few financial standards to explore. In all reality, it’s possible they don’t even have a product on the market yet.

Additional Criteria in Pre-money Valuation

There are several criteria that investors use when suggesting a pre-money valuation when a deep dive into financials is not available. They are:

1. Similar business. This is a comparative analysis of similar, more established businesses. In order to evaluate a startup’s potential; they measure more mature companies’ profitability and market value.
2. Founder and their team. Founders with a proven track record of launching successful start-ups and who have a team of smart people around them, which attracts investors.
3. Amount of interest. If many investors want to take part in a transaction, the founder can leverage that and raise the company’s value. This will allow the founder to preserve more ownership for themselves. However, if there is little interest, the investor has the all the leverage and can dictate the value of the company.

Premoney vs postmoney valuation is highly speculative and typically fiercely negotiated, but pre-money has a basis. It starts with the company’s balance sheet.

At the beginning of Series A, B, and C financing, your pre-money is evaluated for its equity, so if you’re an entrepreneur it’s a great idea to have a solid analytical backing for the numbers when you start your negotiations. There are two different ways to calculate pre-money. Let’s talk a bit about them.

A simplistic way to look at this would be through these methods:

Pre-money valuation = post-money valuation – investment; OR

Pre-money valuation = investment amount/percent of equity sold – investment amount

Enterprise Value to Revenue Multiple Calculation

This calculation is based on equity value + debt – cash ratio. This might seem senseless at first but think about it for a second. How much would the company cost if you purchased it outright?

You would need to pay off the shareholders and assume all the debt. The cash left on the balance sheet should offset these necessary expenditures.

• Market size: This is the “aggregate dollars” or purchase price, including taxes and delivery charges, that the entire market spent on the industry.
• Market share: The percent of the market that your company has captured.
• Revenue: Is market share x market size.
• Multiple: This is calculated by dividing the enterprise value by the annual revenues. For instance, if you have a company with $100 million in equity, and $25 million in debts, with $10 million in cash on hand, and $57 million in annual revenues. The multiple is calculated.
  • Enterprise value = $100 million + $25 million – $10 million = $115 million.
  • Your multiple is then calculated as enterprise value/annual revenues ($115 million/$57 million = 2.07).
• Value: Is the revenue amount in a given period x the multiple (as shown above) = projected value.

Discount Cash Flow (DCF)

The DCF method uses a “time value of money” basis. Meaning that money today is worth more than money in the future because it is on hand now to be invested (and inflation erodes purchasing power).

This method is used when an investor is giving money now, with expectations of receiving more money in the future. Expected future cash flows are found by using a “discounted interest rate.”

This discount rate is the interest rate you need to earn on a set amount of money today to earn a set amount of money in the future.

The discount rate is used when finding the net present value (NPV) of any investment. This discounted interest rate is a crucial piece when discovering if the proposed investment has any value.

Investors use the DCF model concept of “time value of money” to calculate if the cash flow will be higher than the current investments plus costs or if there is a negative value. All proposals using this method should end with a positive future value or other methods need to be considered.

1. A DCF analysis will require investors to estimate future cash flows and values of any equipment, assets, or other investments.
2. Determine the discount rate for the company or investment being reviewed.
3. Determine the company’s level of risk profile. A higher level of risk can bring uncertainty in future cash flows of the business that need to be addressed. The greater the risk, the higher the discount interest rate.
4. Complexity of the venture is also a primary concern. If future cash flows cannot be determined, the DCF isn’t advantageous to the investor and should be reconsidered.

What is a Risk Profile?

Risk profiling is simply a process in which an investor will attempt to identify the amount of optimal level risk they are taking on should they decide to invest. It also exposes any potential threats to the company.

It’s a balancing act between risk and the potential ROI or having less of a chance of losing money in the investment. It’s a very important step in determining asset allocation and mitigating risks.

There are three components to a risk profile:

• Risk required: How much risk an investor would have to take on to invest in the company and receive the expected return on their investment.
• Risk capacity: This will depend on the individual investor. If the investor has a lot of assets and few liabilities, and can stand volatile swings in the market, they could take on a good amount of risk. However, some investors prefer not to see any declines in the market at all and will prefer to relinquish some potential capital to avoid it.
• Risk tolerance: This is all about your investor and what he is willing to do. She must be comfortable with the fact that she may lose some or all her investment. If she can’t tolerate that, she will have to go with lower risk investments. Higher returns often equate to higher potential for unexpected downturns and losses.

The DCF analysis is executed by building a financial picture of the company in an Excel spreadsheet. It requires a great deal of time and detail and analysis. But, since it is the most arduous and detailed of the valuation methods, it generally gives the most accurate valuation. DCF allows you to foresee a company’s intrinsic value based on varying scenarios.

Football Field Chart

Football Field Charts were created by investor and blogger Jim Wang to help new investors understand the difference between risk and return of investments, as well as how it compares to other investments in the market. This is a great way for new investors to get started with figuring out what kinds of stocks they should be investing in.

Regardless of whether you’re a seasoned investor or just getting started, these charts are extremely important for helping to understand the trends in the financial markets and provide actionable information for investors.

The Football Field Chart puts different valuation analyzes next to each other to give investors the “big picture” of a company’s worth using different approaches. An ordinary football field valuation chart will base company value on:

• DCF valuation (explained above)
• LBO analysis
• Comparable companies
• Historical transactions
• Company stock market performance

Is Pre-Money Valuation Equity Value?

Pre-money valuation is the value of a company before the investment takes place. This is calculated by multiplying the post-money valuation or equity value with the percentage of ownership that you are getting in return for your investment.

The pre-money valuation isn’t an actual amount, but a comparison to show how much your investment will be worth after you get into business with others. It also helps you determine how much equity you are trading for that money that has been invested in your project.

A company that accepts seed funding will almost always be pre-money. The investment will go toward helping the founders achieve some milestone such as launching their beta product or opening their first office location. When those goals are reached, the next round of funding (Series A) comes in (post money).

How to Calculate Pre-Money Price-Per-Share?

To calculate the pre-money price per share, we need to know the amount of pre-money valuation and any shares that are currently being paid out to investors. It’s a simple formula:

Per share price = Pre-money valuation / Total outstanding shares.

Next, with this formula, you can determine how many shares to issue the investor:

New Shares Issued = Investment/Share Price

Use the following formula: price per share = prior valuation of money / fully diluted market capitalization. Price per share and pre-money valuation are directly proportional. As one increases, so does the other.

Therefore, the higher the pre-money valuation, the more the investor will pay per share, but the investor will receive fewer shares for the same investment.

Let’s say the founders own 1,000,000 shares (500,000 shares each) together. Next, they need to issue some shares to the investor. Prior to receiving the trust, the value of the company’s stock was $1,250,000 / $1,000,000 = $1.25 per share. When the investment is received, the company will issue new shares to investors.

Number of shares = Investment amount / Expected price per share.

What is the Definition of Post-Money Valuation?

Post-money valuation is one of the most critical aspects of the early stages of starting a company.

It is simply the value that your company is worth after receiving funding. It’s also known as pre-money plus money since it takes into consideration how much money has already been invested in the business.

After the completion of a Series A, B, or C financing, post-money valuation is the estimated market value given to a company.

The valuation calculated before these funds are added is the pre-money valuation. The post-money valuation is equal to the pre-money valuation plus the amount of new capital received from external investors.

Post-money valuation = Pre-money valuation + Investment

Understanding Post-Money Valuation

Investors, like venture capitalists and angel investors, use pre-valuation to work out the capital that must be raised in exchange for a capital injection.

For instance, suppose a company includes a pre-money valuation of $100 million. Venture capitalists will invest $25 million into the company to form a $125 million post-value valuation, $100 million pre-money valuation and $25 million for investors.

In a very basic scenario, an investor holds a 20% stake within the company, as $25 million is comparable to one-fifth of the $125 million post-money valuation.

The above scenario assumes that the venture capitalist or investor and the entrepreneur have an agreement before and after the valuation of the company. There’s plenty of negotiation, especially if the company is small and has relatively few assets and property. 

Importance of Post-Money Valuation for Series Funding Rounds

In the round after financing a growing private sector, dilution becomes a problem. Careful founders and early investors are committed to negotiating terms that balance new capital with acceptable dilution levels wherever possible.

An extra capital increase may mean a priority for preferential liquidation. Other kinds of financing, like warrants, convertible bonds, and stock options, should be considered in the dilution calculation, if applicable.

In a new capital increase, if the pre-money valuation is more than the final post-money valuation, it’s called a “bull round”. “Rounding” is the opposite if the pre-money valuation is less than the post-money valuation. Founders and existing investors are in perfect harmony with bottom-up and bottom-up scenarios. This is often because financing within the downstream round generally ends up in a considerable dilution of existing investors.

There is also a situation called a flat round, where the valuation of cash within the preliminary round of the previous round and the valuation of cash within the post-round are almost equal. Like bearish rounds, venture capitalists usually like to see signs of rising valuations before investing additional funds.

How Is Post-Money Valuation Calculated?

Post-money valuation is a company’s value after investment. This number can be calculated in a couple of ways.

The first method of calculating post-money valuation assumes that all stocks are equal, which is not always the case.

The second method takes into account different types of stocks in the organization to reflect the level of voting rights of each stock at the time of making the decision for the company.

Post-money valuation can be confusing because there are different formulas for calculating it. There is no “right” way to calculate post-money valuation across the industry. However, there is an agreed method.

A contract means that as a beginner, you will meet with an attorney and/or investor. As you go along, you will see there are several ways to calculate it.

1. Post-money Valuation #1

The first method is the simplest and adds the value of the investment to the company’s pre-money valuation.

post-money = pre-money + investment

This calculation cannot specify how other investors’ shares should be calculated. If these investors existed before new investors arrive, it will already be included in the pre-money valuation.

Another way to include these investors in the calculation is to multiply their stocks by the strike price and add it to the total.

Strike price is the fixed price or value of their stock or commodity. The strike price can have a significant impact on the valuation. If the strike price is too high, it could resemble artificial inflation in company valuation.

2. Diluted Post-Money Valuation Method

The second method uses the number of fully diluted shares and the share price. This method allows you to calculate the post-money valuation by multiplying the number of fully diluted shares (including other investors) by the stock price in the current financing round.

As a shareholder, if you own a percentage of a fully diluted stock, expect that to be a percentage of the next valuation. If you bought the stock at a discount during the round (for example convertibles), you can simply say before investing that the company has a low post-money valuation. After all, this is about how startups, investors, and their lawyers agree on post-money valuation.

Consider this formula. Post-money = pre-money + investment. Alternatively, it is not enough to create virtual shares for your employees that don’t add value to your company. With this method, the score is always 5-15% higher depending on the size of the group shares.

Of course, this also has an impact on the fund’s performance. Every company has a shareholder plan for its employees and the assets of the funds are 1.05 to 1.15 times.

What Is Included in Post-Money Valuation?

Once the pre-money valuation is determined, the most important factor influencing the post-money valuation is the fully diluted capitalization. Diluted capitalization ordinarily includes:

• All issued shares of the company’s capital stock, including common stock that was issued after the transition of preferred stock to common stock, if the preferred stock is converted at a one-to-one ratio – if not greater.
• All convertible stocks in circulation of the company or all shares issued after the investors exercise their options to buy additional stock.
• Stock reserved under any of the company’s existing incentive plans including capital incentive plans created or extended in connection with the Series A, B, or C funding round.

Convertible Bonds

A convertible note is a security that is commonly issued to startups. It’s essentially a loan taken out by founders and sometimes employees and converted into equity later.

This note is considered “convertible” because it can be exchanged for shares of preferred or common stock according to the stipulated terms in the agreement between the investor and startup.

Even though these notes are usually non-interest bearing, they’re very similar to bonds, as both instruments provide investors with an ownership stake in the company over time.

Valuation Caps

Investors often negotiate to include caps on convertible bonds. This is because the early initial investment of the investor has made it possible to achieve a high pre-money valuation with the Series A preferred stock loan. Therefore, they can benefit from the cap.

Valuation caps help ensure early investors are rewarded, for example, in crazy situations where valuations go up 5 to 10 times the original amount. Without these restrictions, early investors will not be fully rewarded for their risks. Investors need that floor price to ensure they are rewarded for the risk they are taking.

Warrants

A warrant is a type of security that allows someone to buy something, usually stock, in the future at an agreed-upon price.

Stock warrants are another element of venture debt. In small amounts, they can be important to the overall economics of a deal, especially with the cap table.

Using stocks as a security for getting loans is known as stock warrant. Big companies that have already gone public usually issue a stock warrant, and it gives their shareholders rights to buy new stocks or other assets from the company.

This way the company gets extra funds to invest into something new, while the shareholder gets his investment back with interest, plus he also gains some profit. It’s like a stock option but has its own unique terms.

Stock Options

Stock options are contracts in which the buyer may buy or sell certain shares at a designated price for a limited time.

The purchaser may not choose to exercise the right, but it is a valid option and can be sold to another party before it expires.

Stock options differ from stock in that a stock option is for 100 shares of the original stock. Stock options are a derivative that is tied to the movement of the underlying stock. If the stock price goes up or down, the options follow as well.

Should I Use Pre-Money or Post-Money Valuation?

Pre-money and post-money valuations are important. These valuations also have the greatest impact on determining what percentage the company your investors will secure for their investment. This also determines the percentage the existing stockholders will keep.

A complete understanding of pre and post valuation of money will help in negotiations. Besides being an integral part of the contract, it’s also an easy way to show potential investors that you understand how startups and cap tables work.

Pre-money can be the defining factor that influences your post-money valuation. Understanding what elements are included in a pre-money valuation helps the company make informed decisions when deciding to add a new investor, and ultimately a reliable post-money valuation.

Is Post-Money Valuation the Same as Enterprise Value?

Post-money valuation is the equity value of a company’s stock after receiving cash from a funding round performed by the company.

Investor’s cash infusion adds to the company’s balance sheet multiplying the stock’s worth. The result is post-money valuations are higher than pre-money due to the cash infusion.

Enterprise value, on the other hand, provides an accurate estimate of the comprehensive value of the business. The value of a business is the sum of equity and liabilities minus the total cash on hand the business has. It gives a rough idea of ​​the full debt responsibility that the company has.

Equity + Debt – Cash

Enterprise value considers more than the uncompensated equity value of a business. Enterprise value is useful for comparing companies with varying capital structures because their choice of structure does not affect it.

To purchase a company outright, the investor must undertake the debt of the acquired company but would receive all cash balances from the acquired company.

Accepting the debt increases the cost of purchasing a business, while acquiring cash reduces the costs of procuring that business.

Enterprise Value  =  Market value of operating assets

What Is Post-Money Equity Value?

Equity value provides an easy comparison of current value and possible future value. There are two types of value in a company’s stock: market share, and equity, which is the value of assets minus liabilities.

Equity Value x Share Price + Equity

The post-money valuation of a company refers to the total value of its equity, not the price of individual stocks. Adding more cash on the balance sheet affects the value of a stock, but not the price of an individual stock itself.

Equity value represents the assets and cash that a company generates or may possibly generate, based on growth expectations and operating profit.

For first-time fundraising start-ups, the post-money valuation represents the equity value of the business based on growth expectations and operating profit. Pre-money valuation reflects the business value of today’s business.

Equity Value = Enterprise Value + Cash

How To Calculate Post Money Price Per Share?

In order to raise funds for a financial need, companies will often issue additional shares. In the case of real estate investment trusts, they will obtain more properties and issue additional shares to help their business grow.

Information on the company’s recently issued shares can be found in its annual report. To use that information to calculate the issue price per share:

Calculating price-per-share

First, you need to find company information about recently issued shares. It can be found in annual reports and should include the number of issued shares, net proceeds from issuance, and expenses related to the issuance of shares, like commissions and fees.

You don’t have to calculate the issue price, but annual reports usually show the month the stock was issued and what the revenue was used for.

The calculation is simple. Start with adding net income to the business costs. This will give you the profit of the issuance of shares.

Total Income = Net income + Costs

Then divide the total income by the number of issued shares to calculate the issue price-per-share.

Issue price = Total income/Number of shares issued

Example

Let’s use our fictional company of Howser’s Holding House. They’ve reported several notes after the financial statements, including a note about its common stock.

In September 2020, we issued 13,800,000 shares of common stock, including 1,800,000 shares bought by existing investors who cashed in on their option to purchase additional shares.

After discounts were applied and costs of $22.8 million, the net proceeds which consisted of $528.6 million repaid loans and other investors under our acquisition credit facility.

We have calculated the total income on issuance to be $551.4 million. If you divide this figure by the number of shares issued, 13,800,000, the calculated issue price-per-share is about $39.96.

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