You’re pitching to a group of venture capitalists, excited about the prospect of raising capital to launch your dream company. They ask you, “What’s your valuation? Suddenly, you’re faced with questions about ownership percentages, equity stakes, and terms you may not fully understand.
Perhaps the most frequent pitfall facing founders is the understanding of pre money vs post money value. These numbers play a crucial role in determining how much of your company you’ll give up in exchange for investment. Mistakenly understood, they can result in either ownership dilution or undervaluation of your startup.
In this blog, we’ll break down these valuation concepts, solve the common confusion, and provide actionable tips so you can confidently manage your fundraising journey.
What is Pre-Money Valuation?
Pre money valuation means the value of your company before a new investment. It’s the same as asking, “How much is my startup worth today, given where it is? This valuation provides a starting point for how much equity to sell out when investors put up money.
How Do VC’s determine a Pre Money Valuation?
Venture capitalists (VCs) employ a number of techniques to calculate a pre money valuation, such as:
- Market Comparisons: Investor valuate the TAM of the startup, also looking at similar startups in your industry.
- Revenue and Traction: Growth metrics (e.g., user acquisition or revenue achieved) are important.
- Future Potential: If your startup companies are in a “boom” market, their valuation can increase even if the companies are very early stage.
For instance, if a SaaS company exhibits persistent growth, robust SaaS revenue projection, and scalability as outlined by a SaaS financial model, then its valuation may increase.
What is Post-Money Valuation?
Post money valuation is the value of your company after it receives investment. It’s calculated by adding the investment amount to the pre money valuation.
Formula:
Post-Money Valuation = Pre-Money Valuation + Investment Amount
Let’s say your startup has a pre money valuation of $5 million, and an investor offers $1 million. Your post money valuation would be:
$5,000,000 + $1,000,000 = $6,000,000
Key Differences between Pre-Money and Post-Money Valuation
Timing:
- Pre money valuation is calculated before investment.
- Post money valuation is determined after including the new investment.
Impact on Ownership:
- The ownership percentage of investors is lower with a higher pre money valuation.
- Lower valuations may lead to higher dilution of founder equity.
Negotiation Leverage:
- Founders often push for higher pre money valuations to minimize dilution.
- VCs focus on realistic money valuations based on growth potential.
Importance in SaaS:
Startups with detailed SaaS financial forecasting models and working capital financial models often secure better valuations by showcasing clear growth potential.
Ownership Dilution: A Founder’s Biggest Worry
When raising funds, founders often worry about understanding venture funding dilution math. Dilution occurs when you give up equity to investors, reducing your ownership percentage.
Example of Ownership Dilution
Let’s revisit the $5 million pre money valuation scenario:
- Pre-Money Valuation: $5 million
- Investment: $1 million
- Post-Money Valuation: $6 million
- Investor’s Ownership:
Investment/Post-Money Valuation = 1,000,000/6,000,000/= 16.67%
The investor owns 16.67% of your startup post-investment. If your valuation was lower, say $4 million, the investor’s stake would jump to 20%.
Minimizing Dilution
Use tools like SaaS financial models or projections in B2B SaaS financial models to demonstrate growth potential and negotiate better valuations.
How Venture Capitalists Value Startups
How Do VC’s Determine a Pre Money Valuation?
VCs consider several factors when valuing a startup:
Traction Metrics:
- VC apply rule of 40, measure growth in revenue, users, or product adoption.
- E.g. a company with robust SaaS revenue forecasting can have a higher valuation.
Don’t know about rule of 40, understand here What is Rule of 40 in SaaS (link)
Market Potential:
- VC analyze the market size of startup, high in demand industries (like AI or FinTech) often secure better valuations.
Team and Product:
- Experienced teams and innovative products increase investor confidence.
Following are some more important guide that will help you in startup valuation.
Learn different methods of startup valuations that founders & VCs apply in valuation.
Understand startup valuation using DCF Valuation
Understand: first Chicago method for startup valuation
How Does VC Determine Post Money Value?
Post-money valuation is straightforward:
- The pre money valuation forms the base.
- Investment size determines the final valuation.
Example: A startup with a pre money valuation of $3 million raises $1 million:
Post-Money Valuation = 3,000,000 + 1,000,000 = 4,000,000
The Role of Financial Models in Valuation
Startups that leverage robust financial forecasting models or utilized financial modeling consultant can:
- Present detailed projections to investors.
- Showcase profitability and scalability using excel financial model templates and if you are saas startups, then utilized saas financial model templates.
- Justify higher valuations and minimize dilution.
These models are especially relevant to SaaS products, where it is crucial to forecast metrics such as Annual Recurring Revenue (ARR).
Why Pre-Money and Post-Money Valuations Matter
- Fundraising Success:
Misunderstanding pre money vs post money could result in undervaluing your startup or excessive dilution.
- Future Rounds:
Each funding round affects the next. Startups with clear valuation strategies attract better terms in subsequent rounds.
- Ownership Structure:
A balanced valuation strategy ensures founders retain control while still attracting investor interest.
Common Pitfalls and How to Avoid Them
- Overestimating Valuation:
Founders sometimes set unrealistic pre money valuations, scaring off investors. Focus on realistic metrics and growth projections.
- Ignoring Dilution:
Misunderstanding venture funding dilution math can leave founders with smaller ownership stakes than expected. Always calculate potential dilution before accepting investment.
- Poor Planning:
Failing to prepare accurate SaaS financial models or working capital financial models can weaken your negotiation position.
Real-World Example: Airbnb’s Series F Funding Round
In 2017, Airbnb completed a very large Series F funding round, which is a good example of how pre money vs post money valuation works in practice.
Pre-Money Valuation: Before the investment, Airbnb’s pre-money valuation was $29.3 billion. This valuation reflected its financial performance, growth potential, and strong market perception. It set the baseline for calculating new equity distribution among investors.
Amount of investment: This time, Airbnb collected $1 billion from institutional investors hungry to be the part of that investment that can challenge the hospitality market.
Post-money valuation: Immediately after collecting this amount, the post-money valuation would be $30.3 billion.
Post-Money Valuation = Pre-Money Valuation + Investment Amount
30.3B = 29.3B + 1B
The investors’ $1 billion represented approximately 3.3% ownership of the company, as calculated by:
Investment Amount/Post-Money Valuation = 1,000,000,000 / 30,300,000,000 = 3.3%
This funding allowed Airbnb to expand its platform, invest in new initiatives, and prepare for its eventual public offering. It also exemplifies how pre money and post money valuations shape investor decisions and company strategy.
Understand: Top Startup Funding Sources to Fuel Success and Business Growth
Conclusion
Understanding pre money vs post money valuations is essential for any founder raising funds. By mastering these concepts, preparing accurate financial platform valuations, and using tools like SaaS financial forecasting models, you can negotiate better deals, minimize dilution, and retain control over your startup’s future.
Remember that valuation is not just about the numbers, valuation is about your startup potential. Acquire the knowledge and tools necessary to confidently manage the funding process and to successfully start a business.