Valuing your company can seem complex, but breaking it down helps. This guide covers how to calculate pre-money and post-money valuations and what factors to consider to attract investors effectively.
Pre-money valuation
Pre-money valuation is simply the value of your company before any new investment is added. It establishes the basis for how much equity you’ll offer to investors.
How to calculate pre-money valuation
- Pre-Money Valuation = Number of Existing Shares x Share Price
- Example: If you have 1,000,000 shares valued at $1 each, your pre-money valuation is $1,000,000.
When determining this, consider:
- Fairness: Is this valuation reasonable for both you and potential investors?
- Ownership: How much control are you willing to give up to raise funds?
- Growth potential: Will this valuation allow you to raise additional funds in the future?
- Investor appeal: Can you explain why the company is worth the valuation? Investors want to know how they might profit, so think about potential returns.
Key factors in pre-money valuation
Valuation methods often blend art and science. Some traditional methods include:
- Market comparisons: Look at similar companies and their valuations.
- Discounted cash flow: Estimates future cash flows and discounts them to present value.
- Scorecard approach: Combines various methods to create a valuation range, especially useful when there’s no prior funding round.
When calculating your pre-money valuation, make sure to include:
- All outstanding shares (including special classes).
- Options, warrants, and Employee Stock Option Plans (ESOPs), as if they were converted to shares.
- SAFEs, convertible notes, and other convertible securities treated as shares.
Adjust your number of shares or share price as needed to keep this valuation accurate.
Post-money valuation
Post-money valuation reflects the value of your company after new investments. This helps determine how much equity you’ll give to investors and the overall stake they’ll hold.
How to calculate post-money valuation
- Post-Money Valuation = Pre-Money Valuation + New Investment
- Another way to calculate: (Total Shares After Investment x CSF Offer Share Price) + Investment Amount
- Example: If your pre-money valuation is $1,000,000 and you raise $250,000, the post-money valuation is $1,250,000.
Impact of share dilution
When you bring in new investment, your total share count increases, potentially diluting current ownership. This isn’t always a negative: dilution can be a natural part of funding growth. However, consider how convertible securities like ESOPs or SAFEs affect this.
Evaluate if you’re offering enough room for further rounds. Excessive dilution too early could make future fundraising difficult or affect control over your company.
Carefully setting pre-money and post-money valuations ensures a fair deal for you and your investors. This involves art, science, and strategic planning, all while balancing investor interests and company control. A well-considered valuation will attract investors and set the foundation for growth.
