Pre-money valuation
pree-MUH-nee val-yoo-AY-shun
The value of a company before receiving investment in a funding round.
Pre-money valuation is what your company is worth before the new investment money comes in. If your pre-money valuation is $20M and an investor puts in $5M, the post-money valuation is $25M. The investor owns 20% ($5M / $25M).
Pre-money valuation is the number founders and investors negotiate. It directly determines how much of the company the founders give up. A higher pre-money means less dilution. A lower pre-money means more dilution.
The distinction between pre-money and post-money matters for calculating ownership. If someone tells you 'the company is worth $25M,' you need to know whether that is pre-money or post-money. The difference of one round of investment can change ownership percentages significantly. The term sheet is where this number gets negotiated.
Examples
A founder calculates dilution from a seed round.
Pre-money: $10M. Investment: $2.5M. Post-money: $12.5M. Investor ownership: 20%. The founders and existing shareholders own the remaining 80%. If the pre-money had been $15M, the investor would own only 14.3%.
Two term sheets offer different pre-money valuations.
Firm A offers $5M at $15M pre-money (25% dilution). Firm B offers $5M at $20M pre-money (20% dilution). All else being equal, the founders prefer Firm B's higher pre-money valuation because it means less dilution.
An option pool increase affects the effective pre-money.
The investor agrees to $20M pre-money but requires the option pool to increase by 10% before the investment. The 10% pool comes out of the pre-money, so the effective pre-money for existing shareholders is $18M.
Frequently asked questions
How is pre-money valuation determined?
Through negotiation based on market comparables, growth rate, team quality, and investor demand. There is no formula. A founder with multiple term sheets has leverage to push pre-money higher. A founder with one offer has less negotiating power.
Does a higher pre-money always benefit founders?
Not always. A very high valuation sets expectations for the next round. If growth does not match, the next round might be a down round, which hurts morale and creates complicated ownership dynamics. Raise at a valuation you can grow into.
Related terms
The value of a company immediately after receiving investment, calculated as pre-money valuation plus the investment amount.
The estimated worth of a company, determined during a funding round by negotiation between founders and investors.
The reduction in ownership percentage that existing shareholders experience when new shares are issued in a funding round.
A non-binding document outlining the key terms of an investment, including valuation, board seats, and investor rights.
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