Post-money valuation is a company’s estimated worth after outside financing and/or capital injections are added to its balance sheet. Post-money valuation refers to the approximate market value given to a start-up after a round of financing from venture capitalists or angel investors have been completed. Valuations that are calculated before these funds are added are called pre-money valuations. The post-money valuation is equal to the pre-money valuation plus the amount of any new equity received from outside investors.
What is the 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.
The scenario above assumes that the venture capitalist and the entrepreneur are in total agreement about the pre and post-money valuations. In reality, there is a lot of negotiation, particularly when companies are small with relatively little in the way of assets or intellectual property. As private companies grow, they are better able to dictate the terms of their financing round valuations, but not all companies reach this point.
Importance of Post-Money Valuation to Financing Rounds
n 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. This is because financing in a down round usually results in dilution for existing investors in real terms. As a result, financing in a down round is often seen as somewhat desperate on the part of the company. Financing in an up round, however, there is less reluctance as the company is seen as growing towards the future valuation it will hold on the open market when it eventually goes public.
Post-Money Valuation Formula
Post-money valuation = Value of capital post-infusion
Post-money valuation = New investment * (Total post-investment number of shares outstanding /Shares issued for new investment)
Thus, increase in value due to fund infusion = Vpost – Vpre
Where,
- Vpost = Value of the firm post-money injunction
- Vpre = Value of firm pre-money injunction
Example of Post Money Valuation
XYZ Ltd. is a start-up. It has obtained a series of funding from investors based on business growth needs. The breakup of the same is as follows: –
Calculate the post-money value of the company at the end of each round of funding.
Solution
At Round 1
The first-time company acquired the fund. Hence, pre-money valuation and post-money valuation will be the same. Hence, the value of investment of Mr. B. is equal to $13 million.
At Round 2
Post-money valuation = New investment * (Total post-investment number of shares outstanding /Shares issued for new investment)
- = $21 million * (7.1 million shares/2.1 million shares)
- = $71 million
At Round 3
- = $25 million * (9.6 million shares /2.5 million shares)
- = $96 million
Advantages of Post Money Valuation
- To obtain the actual value of the firm – The real value of the firm is highly essential to assess at every specific point of time. As a result, with the help of post-money valuation, the real value can be identified.
- Ensure safeguarding of interest – All business transactions have one or more impacts on business. On obtaining any lending from a financial institution or corporates, it is always inevitable to check the viability of the business interest and the ability of the company to repay it. It will also ensure the business interest of all the stakeholders.
- Maintains confidence of stakeholders – In post-money valuation, will conduct all scenario analyses for a clear picture of the company’s performance, allowing stakeholders to sustain their interest in its financial viability.
Factors to be Considered While Doing Post Money Valuation
- Current market price – Corporate valuation is highly dependent on the company’s stock market performance and plays a pivotal role in creating market sentiments and building stakeholder confidence.
- Current capital structure and potential equity conversion – While doing pre-and post-money analysis, one must keep the company’s existing equity component and debt obligations in mind. Along with that, one has to consider the potential equity in the company in the form of ESOP, convertible instruments, and other contractual obligations, which can be converted into equity due to some non-compliance.
Limitation in Valuation
There are various methods to do the valuation. Each method has its merits, assumptions, and way of calculation. In addition, with a change in an expert, the usage of methods will change, and as a result, valuation figures will also change. Therefore, the amount that arrives is highly subjective.
FAQs
What is post-money valuation vs pre-money valuation?
Post-money valuation is the outside financing or the latest capital injection. In contrast, pre-money valuation is the company’s value, excluding the latest round of funding or outside financing. It is a critical concept in the company’s valuation as it helps determine its worthiness after it receives and invests the money. In contrast, pre-money valuation needs a better idea of the current business value. So instead, it gives each issued share value.
What is the safe post-money valuation cap?
The safe post-money valuation cap refers to the company valuation estimated containing issuable shares upon conversion. It differs from the safe pre-money valuation cap in some aspects. Investors consider a safe post-money valuation cap as it provides the capability to estimate the company ownership they can buy with their investment made.
Is post-money valuation enterprise value?
The post-money valuation enterprise is an equity value. The business enterprise value is the whole company’s value without taking its capital structure. Moreover, a financing round cannot influence a company’s enterprise value. Therefore, the enterprise value remains constant while the post-money equity value of a company increases by the cash received value.
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