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Business Plan InformationPre-Money vs. Post-Money Valuation
by:
Dave Lavinsky
Once
a institution decides that it must raise capital, a key question that must be answered is how more the institution is worth. For example, if the business inevitably $500,000 to get started and/or grow, how more of the equity in that institution should $500,000 command? Once this question is answered, the institution wish go out and try to find investors. Once
doing so, a key question often arises as to whether the valuation is “pre-money” or “post-money.”
“Before the money"" or “pre-money” and "after the money" or “post-money” denote simple concepts. However, these simple concepts can even as confuse even as the most sophisticated analysts at times. If a institution is valued at $1 million on Day 1, then 25 percentage of the institution is worth $250,000. However, there may be an ambiguity. Suppose the institution and the capitalist
agree on two terms: (1) a $1 million valuation, and (2) a $250,000 equity investment. In this case, the institution may offer the capitalist
250 shares for $250,000. Instantly there can be a disagreement. The capitalist
may have thought that equity in the institution was worth $1,000 per percentage point, in which case $250,000 gets 250 out of 1,000 shares or a 25% equity position. Conversely, the institution may have believed that the capitalist
was conducive to the enterprise which was already worth $1 million. Under this rationale, the $250,000 would-be give the capitalist
250 shares out of 1,250 shares or a 20% equity position.
The critical issue was whether the in agreement value of $1 million to be allotted to the institution was prior to or after the investor's contribution of cash (pre-money) or post-money.
In the above case, a pre-money valuation of $1 million and a post-money valuation of $1.25 million were equivalent. Because mix up the terms could importantly
increase the cost of capital raised, companies must be sure to understand the two metrics and agree with investors to the metric that raises them the capital at the appropriate price.
Just about the author:
GT Business Plans has developed over 200 business plans for clients that have jointly raised over $750 million in financing, launched many
new product and service lines and gained competitive advantage and market share. GT Business Plans is the sister site of GT Venture Capital
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