Post-Money Valuation

What is the Post-Money Valuation?

Post-money valuation is a company's estimated worth after outside financing or potentially capital injections are added to its balance sheet. Post-money valuation alludes to the estimated market value given to a beginning up after a round of financing from venture capitalists or angel investors have been completed. Valuations that are calculated before these funds are added are called pre-money valuations. The post-money valuation is equivalent to the pre-money valuation plus the amount of any new equity received from outside investors.

Grasping Post-Money Valuation

Investors, for example, venture capitalists and angel investors use pre-money valuations to decide the amount of equity they need to secure in exchange for any capital injection. For instance, expect a company has a $100 million pre-money valuation. A venture capitalist puts $25 million into the company, making a post-money valuation of $125 million (the $100 million pre-money valuation plus the investor's $25 million). In an extremely essential scenario, the investor would then have a 20% interest in the company, since $25 million is equivalent to one-fifth of the post-money valuation of $125 million.

The scenario above expects that the venture capitalist and the entrepreneur are in total agreement about the pre and post-money valuations. In reality, there is a ton of negotiation, particularly when companies are small with somewhat minimal in the method of assets or intellectual property. As private companies develop, they are better able to direct the terms of their financing round valuations, however not all companies arrive at this point.

Significance of Post-Money Valuation to Financing Rounds

In subsequent rounds of financing of a developing private company, dilution turns into an issue. Careful founders and early investors, to the degree conceivable, will take care in arranging terms that balance new equity with acceptable dilution levels. Extra equity raises might include liquidation preferences from preferred stock. Different types of financing like warrants, convertible notes, and stock options must be thought of, if applicable, in dilution estimations.

In another equity raise, in the event that the pre-money valuation is greater than the last post-money valuation, it is called an "up round." A "down round" is the inverse, when pre-money valuation is lower than post-money valuation. Founders and existing investors are finely sensitive to all over round scenarios. This is on the grounds that financing in a down round typically brings about dilution for existing investors in real terms. Thus, financing in a down round is many times seen as to some degree frantic with respect to the company. Financing in an up round, in any case, there is less hesitance as the company is viewed as developing towards the future valuation it will hold on the open market when it in the end opens up to the world.

There is likewise a situation called a flat round, where the pre-money valuation for the round and the post-money valuation of the previous round are generally equivalent. Similarly as with a down round, venture capitalists as a rule prefer to see indications of a rising valuation before placing in more money.