What is Pre-Money Valuation?
The Pre-Money Valuation is the total value of your company that founders and investors agree upon before any new investment cash is added. It represents the value of the business, its assets, its technology, and its potential at the moment the term sheet is signed.
This negotiated figure is the most critical component in a funding round, as it directly dictates the price per share that the investor will pay for the new equity.
The Simple Formula The Pre-Money Valuation is the basis for calculating the company's value after the investment (Post-Money):
Pre-Money Valuation = Post-Money Valuation – Investment Amount
A Practical Example If a founder is negotiating a £1 million investment and agrees to sell 20% of the company to the investor, the Post-Money Valuation is £5 million (£1m ÷ 20%). Therefore, the Pre-Money Valuation is:
£5 Million (Post) – £1 Million (Investment) = £4 Million (Pre-Money)
The Calculation of Dilution While the Post-Money Valuation is used to calculate the investor's final ownership percentage, the Pre-Money Valuation is the number that is argued over. The higher the Pre-Money Valuation, the less equity the founder has to sell to raise the required amount of capital.
Key Takeaway: The Pre-Money Valuation is the negotiated price of your business. It is the number that determines how much of your company you need to sell to secure the investment you need.
