Post-money valuation definition
/What is a Post-Money Valuation?
A post-money valuation is the calculated worth of a business, once it receives outside financing. A post-money calculation is needed by investors to determine how many shares they will receive in exchange for their investment.
How to Calculate a Post-Money Valuation
To calculate a post-money calculation, add together the value of a firm prior to the capital injection and the additional amount of financing it then receives. The formula is as follows:
Pre-money valuation + Amount of capital injection = Post-money valuation
Example of a Post-Money Valuation
A firm has a $50 million pre-money valuation. An investor puts $10 million into the business, which results in a $60 million post-money valuation. The investor then has a 16.7% stake in the firm, since the $10 million investment is 16.7% of the company’s $60 million post-money valuation.
Problems with a Post-Money Valuation
It can be difficult for the owners of a business and its new investors to arrive at a post-money valuation, because the pre-money valuation is hard to determine. This is a particular problem for smaller start-up businesses, where there is little cash flow or intellectual property from which to derive a pre-money valuation. A larger, more established business can establish a more easily defensible pre-money valuation, so negotiations over this amount tend to be less strident than for a smaller business.
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The Difference Between an Up Round and a Down Round
When a business accepts additional funding and the pre-money valuation for this round is higher than the post-money valuation for the last round, it is known as an up round. When the reverse is the case, it is called a down round. Up rounds are desired, since they increase the valuations of the shares held by existing investors. Conversely, a down round reduces the valuations for existing investors. A down round implies that a business is having financial difficulties, which allows new investors to take advantage of the situation when negotiating the price of the shares that they will buy. An up round implies that the business is growing strongly, and that investors are willing to pay a higher price in order to acquire shares.
The Flat Round
In rare cases, the post-money valuation from the preceding round of financing matches the pre-money valuation for the current round - this is known as a flat round. The current investors generally want to avoid a flat round, since it implies that the prospects of the business are no longer improving.