A pre-money valuation denotes the value of your company before receiving any external funding.
If a company has already long received funding, it is the value minus the most recent funding raised. The valuation helps investors understand the value of each share of your company.Pre-Money Valuation = Post-Money Valuation – Investment Amount
Post-money valuation refers to the company’s worth after the funding is received. The post-money valuation is highly determined by the external funding and the percentage the investor gets in the company.
The post-money valuation is equal to the investment divided by the percent equity the investor stakes. This will make sense with an example. If an investor nets 10% of a company with a $3 million investment, the post-money valuation is $3 million divided by 0.10. This equals $30 million.
The investor’s ownership percentage and investment amount are what determine the post-money valuation of a company.Post-Money Valuation = Pre-Money Valuation + Investment Amount
Do I Need a Business Valuation?
In short, yes! Business valuations summarize the quantitative value of a company based on hundreds of data points.
A valuation can take thousands of dollars to be conducted by a professional. It entails plenty of market research in addition to analysis of your business plan and accounting. This process can last 6+ weeks.
However, your valuation will also help you personally have a better understanding of your business. This understanding can save you millions of dollars in losses.
It is imperative that all businesses know their valuation sooner or later. This is a vital piece of information that any investor or financial donor will need to know before making a commitment.