How to calculate before and after money valuations on a venture capital financing term sheet?

What are the pre-money valuation and the post-money valuation?

The pre-money valuation of a company refers to the valuation of the company before an investor injects capital into the company. Post-money valuation of a business refers to the valuation of the business after an investor has injected capital into the business. Therefore, the post-money valuation of a company is always equal to the pre-money valuation plus the amount of capital injected by the investor. Both the pre-money valuation and the post-money valuation are expressed in dollars.

What is the importance of valuation before money and valuation after money?

Valuation is essential for both the investor and the company in private equity / venture capital (pe / vc) financing. Before an investor invests in a business, the investor will almost always make an appraisal of the business first. In a financing transaction (for example, a Series A round), investors inject capital into a company in exchange for Series A shares. The company’s pre-money valuation determines how much capital (or percentage of ownership ) obtains an investor in exchange for the capital that he injects into the company in that financing.

Example:

Currently, a company has 4,000,000 ordinary shares held by its founders, being 100% of the company’s capital stock.

It is agreed between the company and Investor A that in the next Series A round, 1,000,000 common shares will be reserved for ESOP.

Therefore, the number of fully diluted company shares before the Series A round is 4,000,000 + 1,000,000 = 5,000,000.

Valuation before money:

Before financing, Investor A gives the company a valuation of $ 4,000,000.

Therefore, the company’s pre-money valuation is $ 4,000,000.

Purchase price per share:

Each share is valued at $ 4,000,000 / 5,000,000 = $ 0.8 (calculated on a fully diluted basis).

Post-money valuation:

Investor A now invests $ 2,000,000 in Venture Tech Ltd. in Series A financing.

Therefore, the company’s post-money valuation will be $ (4,000,000 + 2,000,000) = $ 6,000,000.

Number of new shares issued to Investor A in the Series A round:

Since each share is valued at $ 0.8, Investor A gets ($ 2,000,000 / $ 0.8) = 2,500,000 Series A shares.