Post-money Valuation

For a long time "valuation" was used in funding conversations as a single word. A founder would say the round was being discussed at ten million dollars, and everyone in the room wrote down ten million. But a company's value goes up by exactly the amount of money that comes in. Whichever of the two numbers got called ten million changes what ends up in the contract.

The place the difference bites is ownership. An investor who heard ten million as the pre-money value calculates their stake as two million divided by twelve million, or 16.7 percent. Heard as the post-money value, it's two million divided by ten million, which is 20 percent. Understanding the same sentence differently is worth more than three percentage points. Discovering that gap the day before signing a term sheet, and restarting the negotiation because of it, was not a rare event.

So the two numbers got separate names. The pre-money valuation is the value before the money arrives and the post-money valuation is the value after. Saying which one you mean is now standard practice when quoting a number. Of the two, the one that actually does work in the contract is the post-money valuation, because ownership percentages are calculated from it.

Add this round's investment to the pre-money valuation and you have the post-money valuation. The arithmetic is one addition; the work is in the three lines that follow it.

1. Settle the pre-money valuation. It is the value of what the company holds today, which makes it the number that moves up and down during negotiation.
2. Add the investment. A company with a pre-money valuation of $8,000,000 that raises $2,000,000 has a post-money valuation of $10,000,000.
3. The investor's stake is the investment divided by the post-money valuation. Two million over ten million is 20 percent.
4. The existing shareholders' stake is the pre-money valuation divided by the post-money valuation. Eight over ten is 80 percent. Going from 100 percent to 80 percent is what dilution means.

Contracts are written in shares rather than amounts. A number of new shares gets issued and recorded on the cap table, which is the sheet listing who owns how much. The percentages that come out of that sheet after the new shares are added have to match the ones calculated above.

Two things routinely make them disagree. One is the block of shares set aside for employee stock options. Agreeing to fit that block inside the pre-money valuation means only the existing shareholders absorb it, which can turn 20 percent of dilution into 25 percent. The other is money raised earlier on a SAFE or a convertible note. Those instruments took money without setting a valuation, and they convert into shares during this round, so the real ownership percentages only appear once the converted shares are counted in.

A bigger number is not automatically a better one. The post-money valuation is the price of this particular deal, and a price brings matching expectations with it. Three things get read alongside it.

The first is how much of the company goes out this round. Fifteen to twenty-five percent is typical for an early round. Needing $2,000,000 while agreeing to a pre-money valuation of $4,000,000 means handing over 33 percent, and two more rounds on those terms put the founders under half.

The second is the multiple on revenue. A multiple is a valuation method that applies a factor to revenue or profit; run it backwards and dividing the agreed value by revenue tells you what factor this company was given. Annual recurring revenue of $2,000,000 against a post-money valuation of $10,000,000 is five times. Comparing that against multiples for companies at the same stage shows whether the price is generous or thin.

The third is whether the next round can clear it. This number becomes the starting line for the next negotiation. A company that raised at $10,000,000 post-money and wants $30,000,000 eighteen months later needs revenue to roughly triple in that window. If that looks unlikely, taking a lower number now and leaving room is better than pushing the price up. A down round — raising at a lower value than last time — brings problems considerably heavier than extra dilution.

"When you say ten million, is that pre or post?"

The ownership math changes, so pin down which one before anyone calculates.

"Ten post on two million, so dilution this round is 20 percent."

Existing shareholders go from 100 percent to 80 percent.

"If the option pool goes inside pre-money, our dilution climbs to 25 percent."

Who absorbs the shares reserved for options changes the outcome of an otherwise identical deal.

Through Pagedeck's Series A, the document Grace kept open was a copy of the cap table. Every time the proposed value moved she put the figures into that sheet, changing each of the two values in turn to see how far the founders' and early employees' stakes would fall. The agreed number goes onto the term sheet as a single line, and what stays there is the post-money valuation.

The most common mistake is reading the post-money valuation as what the company is actually worth. The word valuation makes it sound like a price the company could be sold at. But the figure is built by taking the price one investor paid for a minority stake and multiplying it across every share. On top of that, the shares an investor receives are usually preferred stock, which carries the right to get the original investment back first in a sale. A company with a $10,000,000 post-money valuation that sells for $6,500,000 pays the investor their $2,000,000 before anything is split, so the founders and employees holding common stock end up with less than their percentages suggest.

Believing a higher number always means a better negotiation is the other common error. Giving away less ownership for the same money looks like a straightforward win. But this number stays on as the baseline for the next round. A company that stretched for a high price and then can't clear it ends up in a down round, where provisions that top up earlier investors' ownership kick in and cut the founders' share again, and where hiring and the next fundraise both come with more explaining. The highest number available today and the number the company can carry into the next stage are two different figures.