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# Post-Money Valuation: Definition, Examples & Calculation

Updated 1st December 2023
Spela Prijon

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In the press releases announcing new funding rounds – and if you're involved in fundraising processes, in legal and investment documentation – you might see terms like 'pre-money valuation' and 'post-money valuation'. It's helpful for anyone dealing with scale-up financing and corporate development to understand pre-money and post-money valuations and how they're used by companies and investors.

In this article we'll focus on the post-money valuation. Equity is really important in determining the post-money valuation in a funding round, and there a couple of different ways to account for the impact of employees' share options in determining the new valuation of a business.

## What is a post-money valuation?

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A business's post-money valuation is an important part of the calculations that determine the amount investors commit to the business and how much equity is allocated to founders and employees, as well as the new company valuation.

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### Post-money vs pre-money valuation

This is pretty simple: the pre-money valuation refers to the value of the company before an external investor's money is sitting on the cap table. The post-money valuation indicates the value of the business after the investor's money has been accounted for.

Let's use a really simple example: if a venture capital firm decides to invest €1.5 million in a business with a post-money value of €5 million, we can infer that the pre-money valuation of that business is €3.5 million. If the investor invests the same amount at a pre-money value of €5 million, the post-money valuation would be €6.5 million.

## Why does the post-money valuation matter?

The post-money valuation matters for a couple of different reasons. The first is that any investor's stake in the business is closely connected to the valuation. You can use the following formula to determine the equity stake of a new investor using the post-money valuation:

Money invested ÷ post-money valuation = % equity stake

So our investor who commits €1.5 million into a business with a post-money valuation of €5 million would own 30% of the company (1.5 ÷ 5 = 0.3).

The investment amount and equity stake matter because they may imply different official designations for certain stakeholders. For instance, in the UK anyone owning more than 25% of a company's share capital becomes a beneficial owner, a status that could hypothetically be contingent on a post-money valuation.

Employee equity can be a material factor in working out the post money valuation. Let's examine this further.

## Calculating the post-money valuation in a financing round: where does equity come in?

More and more company boards choose to allocate a portion of the company's share capital to employees. This is usually known as the employee option pool. In a new funding round, when the company's valuation is being agreed, the employee equity pool becomes very relevant to discussions. Why?

Simple: most funding rounds will include a back-and-forth debate on whether the employee equity pool should be taken into account before or after the new money being invested into the business. From our blog on option pools:

"A pre-money option pool is when the employee option pool is set up or adjusted on the cap table before the new investor puts their money into the company. Doing this dilutes all existing shareholders but not the new investor. These clauses are seen as 'investor friendly'.

"When the employee option pool is set up or adjusted after the new investor(s)' shares are accounted for [...] the new investor(s)' shares will experience the same dilution as founder stock and the ownership stakes of existing shareholders. It's commonly seen as 'founder friendly' because the founders aren't the only stakeholders seeing their ownership stakes diluted to make room for the employee pool."

If our example funding round  you agree a funding round with a pre-money employee option pool of 10%, the price per share (and, therefore, the post-money valuation) will be reduced. This gives the new investors a bigger chunk of their new portfolio company compared to a post-money option pool.

## What is a post-money option pool?

As you might imagine, in this scenario the employee option pool is set up or adjusted after the new investor(s)' shares are accounted for. Here, the new investors' shares will experience the same dilution as founder stock and the ownership stakes of existing shareholders. It's commonly seen as 'founder friendly' because the founders aren't the only stakeholders seeing their ownership stakes diluted to make room for the employee pool.

## Post-money valuations methods (and examples)

There are a couple of simple ways to get a post-money valuation for a company undergoing a fundraising process.

### Use the investor's equity stake to determine the post-money valuation

The first post-money valuation formula is a kind of inversion of the formula we've already seen used to determine an investor's equity stake:

(Money invested ÷ desired equity stake) x 100 = post-money valuation

Thus, if an investor in our hypothetical financing round targets a 25% equity stake, and intends to commit €1.5 million to the business, the post-money value of the business would be €6 million: (1.5 ÷ 25) x 100 = 6

However, this doesn't take into account factors like whether any convertible notes are present on the cap table. Convertible debt can give certain earlier investors discounts on subsequent funding rounds. One way to incorporate these complexities is to use the number of shares and the share price.

### Take fully diluted share capital into account

The following formula is rooted in the price per share and the company's share capital, rather than the investment amount and equity stake owned by a new investor:

Post-money valuation = (share price at latest round) x (no. of fully diluted company shares)

So if our financing round has a post-money share price of €6 per share, and there are 1 million fully diluted shares, the post-money value of the business would be €6 million.

This method is accepted by many as an industry standard, but every new round of funding is different. The negotiations between the founders and investors are what will usually determine the methodology used to calculate the post-money valuation.

## Getting your post-money valuation right on Ledgy

When negotiating a new round of financing, companies have many variables to consider. Being able to model outcomes ahead of time, and seeing the effect on the cap table, is a big advantage heading into investor negotiations.

Ledgy's scenario modelling toolset lets companies accurately model the impact of pre money valuations and post money valuations on the cap table:

Explore how you could benefit from Ledgy's scenario modelling and cap table management functionality.

A company's post-money valuation is the updated or current value of the business including money committed as part of a new round of financing.

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