I sometimes get asked the question, what does pre money and post money mean and how are they calculated?

Post money represents the value of a company after a round of investment has been made. So for example, if an investor is putting in $2.5 million into a company and getting 25% of the company, the post money valuation is $10 million. That would be calculated as $2.5 million divided by 25% of the company.

The pre money valuation then is the post money valuation less the money that was just put in by the new investor. In the above example, the pre money evaluation would be $7.5 million, which is $10 million less $2.5 million put in the latest round of investment.

In particular, look at the trend of the pre money valuations. Are they going up and, if so, by how much? Does the trend seem to make sense? That can give you an indication of, perhaps, the quality of the pre money valuation.

And, of course, don’t get too hung up on the pre money valuation as an absolute. I feel if you get a high pre money valuation that you’ve done a great job and you are set. The ultimate test will be with the future round of financing and then the ultimate liquidation of the investment. A high pre money valuation in the early round doesn’t mean much if there’s later a down round. It just would go to show that that earlier pre money valuation was done at too high of a level.

So before you go into investment discussion with a potential investor, know the pre and post money valuation that you are thinking about and know the pre money valuation from past transactions. They’ll ask the question and you’ll sound intelligent and will be intelligent by knowing the answer to those questions.

Jon Paul, MBA, CPA, CMC, CM&AA

President, Value Added Finance Resources
Bringing new insights on results and maximizing company value