What is the difference between pre-money and post-money valuation?
FundraisingValuationEquity
Pre-money valuation is the value put on the company immediately before a round. Post-money valuation is that number plus the cash the round brings in. If investors put $2 million into a company at an $8 million pre-money, the post-money is $10 million and the investors own $2 million divided by $10 million, which is 20 percent. Every ownership question in a priced round reduces to that division, which is why investors think in post-money and why a founder should convert every headline number into it before reacting.
Why the two numbers get confused
An investor who says they will invest $2 million at a $10 million valuation may mean pre-money, in which case they are buying 16.7 percent, or post-money, in which case they are buying 20 percent. The difference is over three percentage points of the company on a single ambiguous sentence, so ask which, every time, and write the answer into the term sheet. The price per share is the pre-money divided by the fully diluted shares before the round, and fully diluted usually includes the option pool the investors want in place after the round, which quietly lowers the effective pre-money further.
The same words on a SAFE
A SAFE or note with a post-money valuation cap uses the phrase to mean something narrower: the investor's money divided by the cap is their percentage of the company immediately before the priced round, calculated as if their SAFE were the only one. It is called post-money because the cap is treated as including the SAFE money itself. A pre-money cap, in the older form, divides the cap by the shares outstanding before conversion and lets all the SAFEs dilute each other. The words describe the same idea, whether the new money is inside the valuation or outside it, but a post-money SAFE cap is a percentage promise and a post-money round valuation is a price, and a term sheet can use both in one paragraph.
What a higher pre-money does not tell you
A higher pre-money is not automatically a better deal. A $12 million pre-money with a 15 percent post-money option pool can leave founders with more of the company than a $15 million pre-money with a 20 percent pool, because the pool comes out of the pre-money. Liquidation preferences, participation and anti-dilution terms all change what a percentage is worth on the day the company is sold. The number to compare between two term sheets is what the founders own after the round and what they would receive at a few plausible exit values, and that is a pro forma cap table rather than a valuation.
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Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.