Pre-Money VS Post-Money – A Guide
What is Pre-Money?
The worth of any company before receiving any investments is pre-money. It is void of external financing and latest round of funding. It has some features:
- It describes the startup worth of a business.
- The shares being issued at that specific time are valued.
- It gives investors an idea of value of the business at the current time.
The funds or any other form of money received from investors to invest in the business.
What is Post-Money?
It is the worth of any company after receiving investments. It includes outside funding and the injected latest capital. It is calculated by the formula: post-money = pre-money + investments
What is the main difference between pre-money and post-money?
Pre-money and post-money, both are the measures of checking the worthiness/value of a business and are necessary in this era especially for investors. Though the main difference is in their timings of valuation.
Now get this concept right through a simple example. Assume that a company newly formed has a worth of $2 million. An investor invests $200,000 in it, the company has a pre-money valuation of $2 million and considering the $200,000 investment, the company now has a post-money valuation of $2200,000.
This difference in between pre-money and post-money has a direct relationship with the ownership percentage. And that of inverse relationship of investment with ownership percentage of the entrepreneur. Though the large amount of investment shows low ownership percentage, it is beneficial if the company goes public as it shows millions and millions of post-money valuation.
How to calculate post-money valuation?
The calculation of post-money valuation is simple and straightforward. When the investments is received, it is divided by the rate that is to be given to investors. The remaining investments is added to the pre-money and then in post-money, the valuation of the company rises.
How to calculate pre-money valuation?
The calculation of pre-money valuation is even simpler and easier. It starts with the current valuation of a company which is post-money valuation. The amount of investment is subtracts from it and the resulting amount is the value of pre-money.
Through pre-money valuation, the value of per share of a company can be calculated. It is done by dividing the value of pre-money with the total outstanding shares.
This is a term which is commonly used for private equity and capital venture industries. This valuation is agreed upon by entrepreneurs and investors.
What is better decision between pre-money safe and post-money safe?
There are advantages as well as disadvantages of both the pre-money and post-money valuation and neither of the two is totally a best solution for a company. Specialized for a little different situations, these are two different tools. There are ways of knowing which of the two will be effective in the progress of the company. One of which is fundraising plan for a round given. Some of the parameters are given below, but there are exceptions as well to these parameters.
For an amount below 1.0M
It is a lower level of fundraising which is decided by all the stakeholders and other shareholders. It is the reasonable amount that is invested for the betterment of the company and to push the pre Money if any loss may cause in the future. This a fair way to run the business and take risk.
Amount between 1.0 M and 2.0 M
The decision of this depends upon the circumstances of pre-money and post money. Currently the stakeholder are focusing about the pre-money investment and set their goals on it but with the increase in knowledge and awareness people are more focused about the post money as it is more useful and fruitful for the healthy growth of any firm and stake. This is the money which can create a relative way to the other parties and provide good equity.
Amount above 2.0 M
This the amount which is expectedly invested by a few stakeholder who are liking to maintain large amount of checks and sophistications for the maintenance and growth of the stake. It doesn’t mean that you will not get a good post money on this investment, there is a chance of risk but if we look at the positive end of it we come to know it will gives us good equity and a standard.
The equity will also rise if we have a good relation and communication between the investor and the management of the team. So, the investors should be more target towards the post money.
Y-Combinator of pre money safe:
Safe stands for standard agreement for future equity which is described by the Y- combinator.
The first one is pre-money safe, which in start get a very low amount at a time people are not aware of the importance and necessity of this amount. To get the first money in the company, it is the fast and simple way to enhance the equity and level of the business. With the passage of time, the amount of pre-money is raising higher and higher.
The post- money is measured by the ownership of the stake by which the safe money is accounted for. The founder and the investors both get the big edge and advantage on the post-money. It is depend upon the knowledge of the both the investor and the founder to know about safe and dilution of the buying and purchasing of good.
Which is the better one?
While analyzing the both pre-money and post-money we got some major points to whom we stay on post-money.
Checking the mathematical calculations and the equity round on the ownership place, the default right is not useful for the investors.so a significant convertible is required for the betterment. So we should stay Post-money as it is not having any drawbacks.