As a result of the measures applied for tackling the last financial crisis, entrepreneurial funding have exploded up to $39.4 billion in Q3’17 according to KPMG. VC investment has become a great opportunity, even more considering the lack of opportunities out there. Equity overprice, Fixed income with negative interest rates and other investment assets affected with the different monetary policies, startups have become the option for those willing to invest.
As a result, cap tables have become really complicated to read. Another consequence is the difficulties to know at what valuation you are raising money if you are entrepreneur, or what valuation you are investing in case you are investor, regardless the type.
So what are the differences? Nothing new, while valuing “traditional” equity is really common value the stock counting the equity and those financial instruments convertible in equity, naming those metrics as diluted.
While raising money, it will be really common two ways of valuing that money:
- Pre-Money → Valuation before the investment, employee stock option pool (ESOP) expansion, debt-to-equity conversion and investment.
- Post-Money → Value of the business after all that.
The difference between Pre-Money and Post-Money will the dilution of the financial instruments (company obligations) in previous funding events.
As investor, it is way simpler to understand post-money valuation, just because is fixed and no dilution events (investors no dilution rights or raise debt) will affect your valuation.
Post-money negotiation, the founder and investor can settle on a valuation range before getting into the nitty-gritty of cap table math. However, if you are entrepreneur speak in pre-money terms in order to minimize shocks.
Next Round talk Pre-Money