What is Post-Money Valuation
Applied to the world of start-ups, post-money valuation is a company's value after outside financing and/or capital injections are added to its balance sheet. Post-money valuation refers to a company's valuation after new investments from venture capitalists or angel investors have been made to the enterprise. Valuations that are calculated before these funds are added are called pre-money valuations. The post-money valuation, then, is equal to the pre-money valuation plus the amount of any new equity received from outside investors.
BREAKING DOWN Post-Money Valuation
Investors such as venture capitalists and angel investors use pre-money valuations to determine the amount of equity they need to secure in exchange for any capital injection. For example, assume a company has a $100 million pre-money valuation. A venture capitalist puts $25 million into the company, creating a post-money valuation of $125 million (the $100 million pre-money valuation plus the investor's $25 million). In a very basic scenario, the investor would then have a 20% interest in the company, since $25 million is equal to one-fifth of the post-money valuation of $125 million.
Importance to Founders and Investors
In subsequent rounds of financing of a growing private company, dilution becomes an issue. Careful founders and early investors, to the extent possible, will take care in negotiating terms that balance new equity with acceptable dilution levels. Additional equity raises may involve liquidation preferences from preferred stock. Other types of financing such as warrants, convertible notes, and stock options must be considered, if applicable, in dilution calculations.
In a new equity raise, if the pre-money valuation is greater than the last post-money valuation, it is called an "up round." A "down round" is the opposite, when pre-money valuation is lower than post-money valuation. Founders and existing investors are finely attuned to up and down round scenarios.