Pre-money vs post-money valuation

What do pre-money and post-money mean?

Pre-money valuation is the value placed on a company just before an investor puts in new money. Post-money valuation is the value just after, which equals the pre-money value plus the new investment. The two always differ by exactly the amount invested.

The formula is simple: post-money = pre-money + investment. An investor's ownership is the investment divided by the post-money valuation. This is the most important calculation in a funding round, and many mistakes in negotiation come from mixing the two terms.

How do you calculate investor ownership?

Suppose a startup is valued at ₹40 crore before the money, and an investor puts in ₹10 crore. The post-money valuation is ₹50 crore. The investor's ownership is ₹10 crore divided by ₹50 crore, which is 20 percent. It is a common error to divide by the pre-money figure, which would give 25 percent and overstate the stake.

The new investor's money goes into the company, not to the founders. This is called a primary investment. The company then has ₹10 crore more cash, and the founders' shares are worth the same on paper as before, but are now a smaller fraction of a larger pie.

Why does the difference matter in negotiation?

Headlines often quote one number without saying which. A company that raises ₹10 crore at a ₹50 crore valuation could mean ₹50 crore pre-money, which gives the investor about 16.7 percent, or ₹50 crore post-money, which gives the investor 20 percent. The difference of more than three percentage points is significant for founders.

So founders and investors should always write down which valuation is meant. Term sheets usually state the pre-money valuation clearly, and some newer instruments, such as post-money SAFEs, fix the post-money figure instead.

How does the employee stock pool change the numbers?

Investors often ask that the company set aside a pool of shares for employee stock options, called an ESOP pool, as part of the pre-money valuation. This is called the option pool shuffle. The new shares for the pool are counted before the investor's money, so they dilute only the existing holders, not the new investor.

For example, if the investor wants a 10 percent pool after the round, and it is created before the investment, the effective pre-money price paid to founders falls. Founders sometimes negotiate a smaller pool or a pool created after the round. They should model the effective valuation once the pool is included.

What about a round with several closings or notes?

Convertible notes and iSAFE notes complicate the maths, because the number of shares they will convert into is not known until the next priced round. A note with a valuation cap converts as if the company were worth no more than that cap. Whether the cap is pre-money or post-money changes how much the note holders receive.

Post-money caps are easier to understand, since the note holder's percentage is fixed at conversion no matter how many other notes there are. Pre-money caps leave room for confusion when many notes exist, so founders should list every note and calculate the result in a spreadsheet or cap table tool.

What does this mean for angels and small investors?

Angel investors often receive a share of a company based on a post-money number, because it gives them a clear percentage. If an angel puts in ₹25 lakh on a ₹5 crore post-money valuation, they own 25 lakh divided by 5 crore, which is 5 percent. If the same ₹5 crore were a pre-money figure, the post-money would be ₹5.25 crore and the angel would own about 4.76 percent. The gap looks small, but it grows with larger cheques.

Angel networks that pool many cheques also care about the distinction, since the total round size changes the post-money figure. A founder who collects money from several angels in a single round should add up all cheques before working out the final percentages.

How can founders check their own maths?

The easiest check is to write the numbers in a simple table. List the pre-money valuation, the new money, the post-money valuation and each holder's shares before and after. Then confirm that the percentages add up to 100. A second check is the price per share: pre-money valuation divided by fully diluted shares before the round, and the same price should apply to the new shares.

Using a cap table makes this easier, and many founders keep a pro forma version showing the position after each possible offer. If two investors give different offers, the pro forma shows which one leaves the founders with more, once the option pool, notes and every other item is counted.

Why does the same valuation feel different to investors and founders?

Investors think in terms of what percentage they own and how much it might be worth at exit. Founders think in terms of how much they keep and how much control they hold. A pre-money number of ₹50 crore sounds large to a founder, but if the option pool and notes come out of it, the effective value for existing holders is lower.

The way to avoid surprise is to discuss the effective pre-money value, which is the headline pre-money valuation minus the option pool increase and any notes that convert. Many experienced founders ask for this number before agreeing to a headline price.

A final practical tip is to ask for the numbers in a table. Ask for the pre-money valuation, the new money, the post-money valuation, the price per share, the number of new shares, the option pool and the resulting percentage for each holder, fully diluted. If any figure is missing, ask why. If two offers cannot be compared line by line, ask the investors to restate them in the same format. Many disputes after closing come from a figure that each side understood differently, and a shared table removes most of that risk.

Which one do news reports use?

News reports often quote the post-money valuation, since that is the headline price of the company after the round. But sources vary, and some reports use pre-money or do not say. When StopDown quotes a valuation, treat it as approximate unless the company confirmed which basis it uses.

If you are comparing two rounds, compare like with like. Use post-money for both, or pre-money for both. Comparing a pre-money figure of one round with a post-money figure of another can make a flat round look like an up round, or the reverse.

Read next

• How startup valuation works
• Dilution: why founders own less after every round
• What is a cap table?
• The term sheet, clause by clause
• SAFE and iSAFE notes explained