What does 'Pre-Money Valuation' mean

A pre-money valuation (also known as pre-money) is a familiar term that refers to the value of a company's stock before it goes public or receives other investments. The term is often used by venture capitalists.

BREAKING DOWN 'Pre-Money Valuation'

For example, let's say that Jim's Fabless Donut Shop is thinking of going public. If management and venture capitalists estimate that the company will raise $100 million in the IPO, it is said to have $100 million in pre-money.

Valuing a company's stock before it goes public is a difficult task. When venture capitalists and entrepreneurs talk about pre-money, they have to be very careful not to fall into the trap of "counting their chickens before the eggs have hatched" – or, in other words, spending money they don't actually have.

How Pre-Money Valuations Are Determined

Pre-money valuation can also refer to the period before any investment or funding of any type is put towards a company, not just when it is traded on public markets. This includes a valuation prior to seed, angel, or venture funding is put into a company. A pre-money valuation at this stage may also coincide with the company being pre-revenue, meaning that it has yet to generate any sales.

The company might not yet have its product or service ready for release. This means its pre-money valuation will be based on a variety of other factors. One such measure may be comparable businesses. An assessment of the revenue and market value of established, more mature companies that have a similar focus and operational approach can serve as a gauge of the potential for pre-money companies.

Even if the pre-money company claims it is creating an entirely new industry with new business models, its prospects will likely be cast in the vein of an earlier business. For example, if a new company planned to produce a new type of automated vacuum cleaner, its pre-money valuation might be established in part by assessing the performance of other makers of robot vacuums. Other factors that may contribute to the pre-money valuation can be the experience and track record of its founders and leaderships, the feasibility of delivering on promised services, and any competition that may arise.

Who determines the Pre-Money Valuation

The pre-money valuation may be a figure proposed by a potential investor. The number could then be used as a basis for the amount of funding they will provide and how much ownership they expect in return. The leadership of the company might reject pre-valuations proposed by others until they reach an amount that matches the aspirations of the company.

RELATED TERMS
  1. Asset Valuation

    Asset valuation is the process of determining the fair market ...
  2. Business Valuation

    Business valuation is the process of determining the economic ...
  3. Valuation

    A valuation is the process of determining the current worth of ...
  4. Rich Valuation

    Rich valuation can be used in several contexts in finance, and ...
  5. Relative Valuation Model

    A relative valuation model is a business valuation method that ...
  6. Historic Pricing

    Historic pricing is a method for calculating the value of an ...
Related Articles
  1. Investing

    How To Value An Internet Stock

    An academic study, published several years after the peak of the dot-com bubble in March 2000, accurately described just how whacky internet valuations grew until the bubble burst. The study's ...
  2. Small Business

    How Venture Capital Will Change in 2016

    Venture capitalists face a tech bubble on the horizon, along with an influx of new non-traditional investors via Wall Street and crowdfunding platforms.
  3. Financial Advisor

    An Introduction To The Chartered Business Valuator Designation

    Business valuation is a fast growing field. Discover how you can take advantage with a CBV designation.
  4. Investing

    Assessing Asset Bubbles: Microsoft in 2001 vs. Today (MSFT)

    Understand the inner working of high-multiple stocks such as Microsoft, especially how earnings may play a role in the change of a stock's multiple.
  5. Small Business

    Are Tech Unicorns an Endangered Species?

    Tech unicorns seem to be losing investors' confidence. Here’s why and what it means for the tech sector.
  6. Investing

    Peer Comparison Uncovers Undervalued Stocks

    Learn how to put one of the top equity analysis tools to work for you.
  7. Investing

    4 Reasons for the IPO Market Slowdown in 2016 (IPO)

    Pay attention to the length of time a company waits before going public and whether the prolonged period brings excessive valuation.
  8. Small Business

    Startup Analysis: How Much Is Airbnb Worth?

    Learn about the private company Airbnb and how it achieved success. Understand how much it is worth and how that value was determined.
  9. Investing

    Discounted Cash Flow (DCF)

    Discover how investors can use this valuation method to determine the intrinsic value of a stock.
RELATED FAQS
  1. Pre-Money vs Post-Money

    Learn the important distinction between pre-money and post-money valuation and how it affects ownership percentages. Read Answer >>
  2. What type of funding options are available to a private company?

    Understand how private companies can obtain financing for startup, growth or expansion projects, and learn how this differs ... Read Answer >>
Trading Center