Pre-money vs. post-money valuation

So today I was emailed the question,

“What is the difference between pre-money vs. post-money valuation of a VC funded firm?”

Pre-money valuation is how much the firm is worth before the VC invest in your company, post-money valuation is how much it is worth after. Pretty self-explainatory. It is interesting to note that this one of the most important negotiating points as it decides how much stock a VC firm would get in return for the money it gives you. Typically this amount is between 10% and 50% with an expected annual return of 20% or more.

An example

A VC firm invests $10 million in 10 companies for a total of $100 million. Most companies falter but one does really well and after 5 years, makes $50 million.

So today I was emailed the question,

“What is the difference between pre-money vs. post-money valuation of a VC funded firm?”

Pre-money valuation is how much the firm is worth before the VC invest in your company, post-money valuation is how much it is worth after. Pretty self-explainatory. It is interesting to note that this one of the most important negotiating points as it decides how much stock a VC firm would get in return for the money it gives you.

If a company and an investor agree on two terms:

1. a $1 million valuation
2. a $250,000 equity investment

then the latter would be either 20% or 25% of a company’s equity based on the pre-money vs. post-money valuation.  More information here: http://bit.ly/3GrhPZ

Meanwhile, the VC would have an expected annual return of 20% or more.

Timing

If this is indeed the path you want to do down, keep in mind it is a pretty time intensive commitment–it typically takes 6 to 9 months and between 500 to 1000 work hours. Things that need to be taken care of include:

• improving the business plan
• an offering memorandum
• due diligence items
• a targeted investor list

Source

http://bit.ly/H7OCy

http://bit.ly/hJ408