Pre-Money Valuation

What Is Pre-Money Valuation?

A pre-money valuation alludes to the value of a company before it opens up to the world or gets different investments like outer funding or financing. Put basically, a company's pre-money valuation is how much money it is worth before anything is invested into it. The term, which is likewise basically alluded to as pre-money, is frequently utilized by venture capitalists and different investors who aren't promptly engaged with a company. This figure permits them to determine what their share in the company is, in view of the amount they invest.

Figuring out Pre-Money Valuation

Pre-money is the valuation of a company before any rounds of financing, and provides investors with an image of what the company's current value might be. Be that as it may, it's anything but a static figure, and that means it can change. That is on the grounds that the valuation is determined before each round of financing, whether that is private or public investment. Pre-money can be determined just before a company is traded on public markets. You can likewise utilize the pre-money valuation before seed, angel, or venture funding is put into a company.

The pre-money valuation might be a figure proposed by a possible investor. The number could then be utilized as a basis for the amount of funding they will give and how much ownership they anticipate in return. The leadership of the company could dismiss pre-valuations proposed by others until they arrive at an amount that matches the goals of the company.

Computing the pre-money valuation for a company is genuinely simple. You do, however, need to know the post-money valuation, which is made sense of somewhat further down. Here is the fundamental formula:

Pre-Money Valuation = Post-Money Valuation - Investment Amount

So a company whose post-money valuation is $20 million in the wake of getting a $3 million investment has a pre-money valuation of $17 million.

Special Considerations

Beginning phase valuations may likewise correspond with the company being pre-revenue, meaning it still can't seem to produce any sales. This might be on the grounds that it doesn't have a product on the market yet. Investors can in any case determine the company's value, basing it on different factors. One such measure might be comparable businesses. An assessment of the revenue and market value of additional laid out, mature companies with a comparative concentration and operational approach can act as a measure of the potential for pre-money companies.

Even if pre-money companies claim they are making an altogether new industry with new business models, their possibilities will probably be projected in the vein of a prior business. For instance, in the event that another company plans to deliver another type of automated vacuum cleaner, its pre-money valuation may be laid out in part by surveying the performance of different producers of robot vacuums. Different factors that might add to the pre-money valuation can be the experience and history of its founders and leaderships, the feasibility of following through on guaranteed services, and any competition that might emerge.

Something important venture capitalists and entrepreneurs need to consider when they talk about pre-money is to be exceptionally careful not to fall into the trap of counting their chickens before the eggs have brought forth or, as such, spending money they don't really have.

Investors ought to make sure they don't spend money they don't really have when they talk about pre-money valuations.

Pre-Money versus Post-Money Valuation

As its name infers, post-money valuation is not quite the same as pre-money since it demonstrates how much a company is worth after it gets an investment. This incorporates any amount of capital — raised through a public offering or through private, outer sources. The post-money valuation is the total of the pre-money, plus the extra equity infused into the company. Thus, on the off chance that a company's pre-money valuation is $25 million and it gets $5 million from an investor, the post-money valuation is $30 million. This is an important figure since investors can figure out how much equity has a place with them after they invest in a company.

Illustration of Pre-Money Valuation

Here is a simple illustration of the pre-money valuation of a made up dessert shop. Suppose that Jim's Fabless Donut Shop is considering going public. The owner puts forward the business proposal with expectations of drawing in likely investors. Assuming management and venture capitalists estimate that the company will bring $100 million up in the initial public offering (IPO), it is said to have $100 million in pre-money.

Features

Pre-money valuation is the value of a company before it opens up to the world or gets different investments like outside funding or financing.
Potential investors can utilize the pre-money value of a company to determine the amount it's worth before they invest their money.
Pre-money valuations are not quite the same as post-money valuations, which determine a company's worth after it gets funding or financing.