Pre-money and post-money

“We raised $1M at $15M” is a short report of a sale. The investors paid $1M. In return, they got a part of the company. The $15M is the price of the whole company. Two words tell you what kind of price it is: pre-money and post-money.

Two moments, two valuations

Think of the round as one moment, with a “before” and an “after”:

• The pre-money valuation is the value of the company just before the investors’ money comes in.
• The post-money valuation is the value just after the money comes in.

After the round, the company holds the investors’ cash. Thus the company is worth that much more. This gives the one equation of this lesson:

Post-money = Pre-money + New money
$15M       = $14M      + $1M

What the investors get

The investors own the part of the company that their money paid for. Their cash is inside the company after the round, so you divide by the post-money number:

Investors' share
  = New money ÷ Post-money
  = $1M ÷ $15M
  = 6.67%

Before the round, the founders owned 100%. After the round, they own 93.33%. This decrease from 100% to 93.33% is dilution.

Calculator

Pre-money, post-money, and what you sell

Change the raise and the valuation. Watch how much of the company the new investors get.

The valuation you were quoted is

Post-moneyPre-money

Amount raised

Post-money valuation

$15M

Pre-money

$14M

Post-money

$15M

Investors get

6.67%

$1M ÷ $15M

Founders keep

93.33%

Ownership after the round

• Founders
• New investors

The investors pay $1M for 6.67% of a company worth $15M after their money comes in. Before the money comes in, the company is worth $14M.

Every holder keeps the same part of what they had

A round does not take shares from anybody. The company issues new shares to the investors, and each holder from before the round keeps all of their shares. Thus each of them owns a smaller part of the company, and each part decreases in the same proportion.

Ada owns 60% of Northwind Labs, and Ben owns 40%. Northwind raises $1M at a $15M post-money valuation, so the round sells 6.67% of the company. Each founder keeps 93.33% of what they had:

Each holder keeps = 1 − 6.67%
                  = 93.33%

Ada       = 60% × 93.33% = 56%
Ben       = 40% × 93.33% = 37.33%
Investors =                6.67%

The total of the three parts is 100%. Ada and Ben still divide their part in the ratio 60 to 40. The round changed the size of their part, not the ratio between them.

The same rule applies to investors from earlier rounds. A seed investor who owns 20% before a Series A that sells 20% owns 20% × 0.8 = 16% after it. Each new round dilutes every holder from before the round, investors and founders together.

Why “pre” or “post” is important

Predict first

An investor offers $5M at a $20M valuation, and the $20M is the pre-money valuation. What part of the company does the investor get?

Type a guess before you continue. A guess first, even a wrong one, makes the answer easier to remember.

Your guessSave my guess

The same number can give two different deals. Compare these two offers for a $1M raise:

Offer	Pre-money	Post-money	Investors get
“$1M at $15M post”	$14M	$15M	6.67%
“$1M at $15M pre”	$15M	$16M	6.25%

The second offer is better for the founders. They sell less of the company for the same money. Here the difference is small. On a $5M raise at $20M, the difference is 25% against 20%.

Work it out

An investor offers $2M at an $18M pre-money valuation. What percentage of the company does the investor get?

Your answerCheck

The same equation in a SAFE round

Many first rounds do not sell shares at once. The investors sign a SAFE, a contract that converts into shares at a later priced round. A SAFE has no price per share yet, but it usually has a valuation cap. On a post-money SAFE, the cap is a post-money valuation, so the equation of this lesson applies:

SAFE share = Amount ÷ Post-money cap
10%        = $1M    ÷ $10M

This share is the part of the company that the SAFE investors get just before the priced round. The priced round then dilutes them, the same as all other holders. The lesson post-money cap math shows the full calculation, and how several SAFEs add together.

Read a headline

News stories and founders give rounds in a short form. Use these steps to read one:

1. Find the new money. In “a $4M seed round”, the new money is $4M.
2. Find the type of valuation. Look for the word “pre-money” or “post-money”. If the headline does not say, ask the company or the investor.
3. Calculate the other valuation: post-money = pre-money + new money.
4. Divide the new money by the post-money valuation to get the part that the round sells.

Worked example · step 1 of 5

Northwind's seed headline: $4M at a $16M pre-money valuation

1. 1

   Find the money and the valuation

   The headline gives $4M of new money and a $16M valuation. The word "pre-money" tells you the type of valuation.

   New money           = $4M
   Pre-money valuation = $16M

Show step 2Show all steps

Solve for the third number

The equation has three numbers. If you know two of them, you can calculate the third. Each line below is the same equation in a different form. In the last two lines, “share” is the investors’ share:

Post-money = Pre-money + New money
Pre-money  = Post-money − New money
New money  = Post-money × Share
Post-money = New money ÷ Share

The last two lines are useful in a negotiation. If an investor wants 20% of a company with a $20M post-money valuation, the round raises 20% × $20M = $4M. If you want $4M and you agree to sell 20%, the post-money valuation is $4M ÷ 20% = $20M.

Now do the steps yourself.

Work it out

A news story says that a startup raised $6M at a $30M post-money valuation. What is the pre-money valuation?

Your answerCheck

Work it out

The founders of Juniper Analytics agree to sell 25% of the company for $5M. What post-money valuation does that give?

Your answerCheck

What the market pays

A median is the middle deal, not a target. The lesson how valuations are set shows how far real deals are from these medians, and how founders set their own number.

A valuation is not money in the bank

A $15M post-money valuation does not tell you that the company has $15M. The company has the $1M from this round, plus the cash it had before. The valuation is the price at which one group of investors agreed to buy one part of the company. It is the result of a negotiation, not a measurement.

Think of a company with $300K in the bank before a round of $1M at a $15M post-money valuation. After the round, the company has $1.3M of cash. The $15M is the price of 100% of the company, at the price that the investors paid for their part. If the company spends $100K each month, the cash lasts 13 months, and the valuation does not change that number.

Then why do founders want a high valuation?

With a higher valuation, you sell less of the company for the same money. More ownership stays with you, your team, and later rounds. But a very high valuation also sets a high bar. The next investors must agree to an even higher price, or the company has a down round. The lesson on exits shows one more cost: some terms that come with a high valuation pay investors first when the company is sold.

Quiz · question 1 of 5

Test what you learned

A startup raises $3M at a $12M post-money valuation. What is the pre-money valuation?

• A$9M
• B$12M
• C$15M
• D$4M