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| {{Confusing|date=July 2008}}
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| A '''pre-money valuation''' is a term widely used in [[private equity]] or [[venture capital]] industries, referring to the [[Valuation (finance)|valuation]] of a company or asset prior to an [[investment]] or [[finance|financing]].<ref>http://www.investopedia.com/ask/answers/114.asp#ixzz1WQq46zn0</ref> If an investment adds cash to a company, the company will have different valuations before and after the investment. The pre-money valuation refers to the company's valuation before the investment.
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| External investors, such as [[venture capitalist]]s and [[angel investors]] will use a pre-money valuation to determine how much [[Stock|equity]] to demand in return for their cash injection to an [[entrepreneur]] and his or her [[startup company]].<ref>http://www.avc.com/a_vc/2011/08/pricing-a-follow-on-venture-investment.html</ref> This is calculated on a fully diluted basis.
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| Usually, a company receives many rounds of financing (conventionally named Round A, Round B, Round C, etc.) rather than a big lump sum in order to decrease the risk for investors and to motivate entrepreneurs. Pre- and post-money valuation concepts apply to each round.
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| ==Basic formulae==
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| :<math>\text{post-money valuation} = \text{new investment} \,\cdot\, \frac {\text{total post investment shares outstanding}}{\text{shares issued for new investment}}</math>
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| :<math>\text{pre-money valuation} = \text{post-money valuation} - \text{new investment}</math>
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| ==Round A==
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| Shareholders of Widgets, Inc. own 100 shares, which is 100% of equity. If an investor makes a $10 million investment (Round A) into Widgets, Inc. in return for 20 '''newly issued''' shares, the implied [[post-money valuation]] is:
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| : $10 million * (120 / 20) = $60 million
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| This implies a pre-money valuation equal to the post-money valuation minus the amount of the investment. In this case, it is:
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| : $60 million – $10 million = $50 million
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| The initial shareholders dilute their ownership to 100/120 = 83.33%.
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| ==Round B==
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| Let's assume that the same Widgets, Inc. gets the second round of financing, Round B. A new investor agrees to make a $20 million investment for 30 newly issued shares. If you follow the example above, it has 120 shares outstanding. Post-money valuation is:
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| : $20 million * (150 / 30) = $100 million | |
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| The pre-money valuation is:
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| : $100 million – $20 million = $80 million
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| The initial shareholders further dilute their ownership to 100/150 = 66.67%.
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| ==Upround and downround==
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| Upround and downround are two terms associated with pre- and post-money valuations. If the pre-money valuation of the upcoming round is higher than the post-money valuation of the last round, the investment is called an upround. If the pre-money valuation is lower than the post-money valuation of the previous round, then the investment is called a downround.<ref>[http://bartekr.wordpress.com/ Cap Table Basics]</ref> In the above example, Round B was an upround investment, because pre-money B ($80 million) was higher than was post-money A ($60 million).
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| A successful growing company usually receives a series of uprounds until it is [[Initial public offering|launched on the stock market]], sold, or merged. Downrounds are painful events for initial shareholders and founders, as they cause substantial ownership dilution and may damage the company's reputation. Downrounds were common during the [[dot-com crash]] of 2000–2001.
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| ==See also==
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| *[[Post-money valuation]]
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| *[[Capitalization table]]
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| ==References==
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| {{Reflist}}
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| ==External links==
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| *[http://www.investopedia.com/ask/answers/114.asp Forbes Investopedia: What's the difference between pre-money and post-money? ]
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| *[http://www.thestartuplawyer.com/venture-capital/what-is-a-pre-money-and-post-money-valuation Ryan Roberts: What is a Pre-money and Post-money Valuation?]
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| *[http://www.socaltech.com/Insights/showarticle.php?id=00040 Samuel Wu: Venture Capital 101 for Startups — Valuation]
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| {{Private equity and venture capital}}
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| [[Category:Private equity]]
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| [[Category:Venture capital]]
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| [[Category:Valuation (finance)]]
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