Loading the player...
A:

The short answer to the question is that they differ in timing of valuation. Both pre-money and post-money are valuation measures of companies. Pre-money refers to a company's value before it receives outside financing or the latest round of financing, while post-money refers to its value after it gets outside funds or its latest capital injection. Pre-money valuation refers to the value of a company not including external funding or the latest round of funding. Post-money valuation, then, includes outside financing or the latest injection. It is important to know which is being referred to as they are critical concepts in valuation.

Let's explain the difference by using an example. Suppose that an investor is looking to invest in a hi-tech startup. The entrepreneur and the investor both agree that the company is worth $1 million and the investor will put in $250,000.

The ownership percentages will depend on whether this is a $1 million pre-money or post-money valuation. If the $1 million valuation is pre-money, the company is valued at $1 million before the investment and after investment will be valued at $1.25 million. If the $1 million valuation takes into consideration the $250,000 investment, it is referred to as post-money.

prepost1.gif

As you can see, the valuation method used can affect the ownership percentages in a big way. This is due to the amount of value being placed on the company before investment. If a company is valued at $1 million, it is worth more if the valuation is pre-money compared to post-money because the pre-money valuation does not include the $250,000 invested. While this ends up affecting the entrepreneur's ownership by a small percentage of 5%, it can represent millions of dollars if the company goes public.

This topic gets very important in situations where an entrepreneur has a good idea but few assets. In such cases, it's very hard to determine what the company is actually worth and valuation becomes a subject of negotiation between the entrepreneur and the venture capitalist.

(For further reading on this concept, see our IPO Basics tutorial.)

RELATED FAQS
  1. What are the differences between downround and upround financing?

    Understand what down rounds and up rounds of financing mean, and learn about the typical progression of a company through ... Read Answer >>
  2. What are the pros and cons of downround financing?

    Read about the pros and cons of down round financing for a company that has seen its valuation decrease, and see how it impacts ... Read Answer >>
  3. What type of companies use downround financing?

    Read about the types of companies that are most likely to rely on down round financing, and why existing shareholders don't ... Read Answer >>
  4. What is the difference between economic value and market value?

    Learn about the differences between economic value and market value. Discover how they serve different purposes for businesses ... Read Answer >>
Related Articles
  1. Investing

    Startup Analysis: How Much Is Uber Worth? (FB, GOOG)

    Learn about the private company Uber and how it has found so much success since 2010. Understand the valuation of the company in 2015.
  2. Investing

    Relative Valuation: Using Stocks To Value Other Stocks

    This effective approach will help you understand which stocks you should be investing in.
  3. Investing

    How An IPO Is Valued

    The initial valuation of an IPO can determine the success or failure of a specific stock - but how is that price determined?
  4. Small Business

    Startup Analysis: How Much Is Dropbox Worth?

    Learn about the private company Dropbox and how it operates. Understand the company's current valuation, how it was derived, and if it deserves it.
  5. Small Business

    Startup Analysis: How Much Is Spotify Worth? (AAPL)

    Learn about the private company Spotify and how it has achieved success. Understand the company's most recent valuation and if it is warranted.
  6. Tech

    Are High Valuations In Silicon Valley Over?

    Silicon Valley valuations, which hit the roof earlier this year, are coming down to earth. What caused the rise? And, what brought about their downfall?
  7. Insights

    How Is a Business Valued on "Shark Tank?"

    How entrepreneurs and the Sharks value a business likely takes into account present value, future value, the value of companies similar to it and risk.
  8. Small Business

    Is the Private Equity Bubble Still Expanding? (GS)

    Learn about the factors influencing valuations in the private equity market. Find out if there is a private tech bubble and if it is growing in 2016.
  9. Small Business

    Public Vs. Private Tech Valuations: What's Driving the Divide?

    The gross valuations over the past five years are more indicative of the market than the true value of the company itself.
  10. Investing

    How To Choose The Best Stock Valuation Method

    There is no single valuation tactic that works in every situation. But a company’s characteristics provide clues to investors about the best method to use.
RELATED TERMS
  1. Pre-Money Valuation

    A slang phrased that refers to the value of a company's stock ...
  2. Business Valuation

    The process of determining the economic value of a business or ...
  3. Valuation Analysis

    A form of fundamental analysis that looks to compare the valuation ...
  4. Down Round

    A round of financing where investors purchase stock from a company ...
  5. Historic Pricing

    A method for calculating the value of an asset using the last ...
  6. Rich Valuation

    An asset that is being valued by investors at a very substantial ...
Hot Definitions
  1. Ponzi Scheme

    A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns ...
  2. Dow Jones Industrial Average - DJIA

    The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange ...
  3. Revolving Credit

    A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is ...
  4. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
  5. Contango

    A situation where the futures price of a commodity is above the expected future spot price. Contango refers to a situation ...
  6. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
Trading Center