What is the difference between pre-money and post-money valuation of a startup?

Question

I'm preparing the Entrepreneurship and Start Up elective for CMA Final. When an investor says he will invest Rs 2 crore at a Rs 8 crore valuation, how do I know what % he gets? I'm confused between pre-money and post-money valuation.

GradeHunt_Team · Answer

Pre-money valuation is what the startup is worth just before the new money comes in. Post-money valuation is its worth just after.

Post-money valuation = Pre-money valuation + New investment
Investor's stake = Investment / Post-money valuation

Your example, read both ways:
1. If Rs 8 crore is the pre-money valuation:
Post-money = 8 + 2 = Rs 10 crore
Investor's stake = 2 / 10 = 20%

2. If Rs 8 crore is the post-money valuation:
Pre-money = 8 - 2 = Rs 6 crore
Investor's stake = 2 / 8 = 25%

Same cheque, 5 percentage points of difference in ownership. So in a question (and in a real term sheet), first find out which valuation is quoted.

With shares: say the founders hold 8,00,000 shares and the pre-money valuation is Rs 8 crore.
Price per share = 8 crore / 8,00,000 = Rs 100
New shares to the investor = 2 crore / 100 = 2,00,000
Total shares = 10,00,000, and the investor holds 2,00,000 / 10,00,000 = 20%. This matches case 1.

Where post-money valuation comes from in the venture capital method:
Post-money valuation = Terminal value / Anticipated ROI
If the investor expects the startup to be worth Rs 100 crore at exit and wants a 10 times return, post-money = 100 / 10 = Rs 10 crore. With a Rs 2 crore investment, pre-money = 10 - 2 = Rs 8 crore.

Founders want a higher pre-money valuation because they give away less of the company for the same money. Investors want a lower one because their % stake and expected return go up.

What is the difference between pre-money and post-money valuation of a startup?

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