The value of a business in a transaction starts with determining the pre-money and post-money valuation. This valuation will be used to determine how many shares will be issued to the new investor and what percentage of ownership (after dilution) will the owners keep. The pre-money valuation is the value attributed to the business before any new equity is invested and any new shares are issued.
Pre-money valuation is the enterprise value of a company prior to raising capital while post-money valuation is the value immediately after the capital investment. Thus, the post-money valuation is equal to the pre-money valuation plus the total capital raised.
Knowing the pre and post-money valuation is key in determining the investor’s ownership after the investment and the dilution to existing shareholders, in other words, what percentage of the company will retain after the capital raise.
Usually, this is a typical discussion between investors and founders at early stage rounds of investment to determine how much the investor will pay per share of stock. Term sheets will use either pre or post-money valuation throughout the investment, negotiation and closing. When raising capital, pre-money valuation and the dilution of your ownership is an important issue as a business owner and must be clearly addressed before engaging into capital raises.
Before you get into any capital raising discussions with an angel investor or venture capitalist, contact us to help you make the right decision.