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What is Post Money Valuation?
Post money valuation refers to the value of the business after the investor has invested money.
Post-money valuation is essentially what the company is worth after taking into account the amount of investment. It is a common method of valuing a company in an M&A transaction.
Valuation is a metric that shows the worth of an asset or company. There are two types of valuations: pre-money and post-money. In pre-money valuation, the value of the company is calculated before the investor invests in the company. In post-money valuation, the value is calculated after the investor invests in the company.
Post money valuation is calculated by subtracting the value of the investor's investment from the pre-money valuation.
Post Money Valuation = Pre Money Valuation + Amount of Cash Raised
The next section discusses the different types of financing rounds and their significance for founders and investors.
Types of Financing Rounds
When raising funds, investors often examine whether the company's current pre-money valuation is greater than its previous post-money valuation. This is to ascertain whether the business has grown since the last investment. This brings us to the types of financing rounds.
There are three types of financing rounds: up round, down round, and flat round.
- Up Round
An up round refers to a financing round that raises capital at a higher valuation than the last round.
Simply put, it is called an up round because the valuation of the company has gone up. For example, if a tech company has raised money and the current Series B pre money valuation is more than the post money valuation of Series A. Then, they are an up round company. Sometimes investors are willing to pay higher prices for companies that are doing well.
- Down Round
A down round is the opposite of an up round, and it is when a company raises funding at a lower valuation than the previous financing round.
A fall in valuation can occur for a variety of reasons. In most cases, this happens when the company isn't performing as well as investors had hoped. For example, a ride-sharing company has raised money for its growth. But it has not performed as well as its investors had hoped because it is losing money on each ride. So, the company’s valuation has fallen in the next round since the company is not doing well.
- Flat Round
A flat round is when a company raises funding at the same valuation as the previous financing round. Since there is no change in the valuation, it is referred to as the Flat Round.
Up round and down round scenarios are closely followed by founders and existing investors since they determine the company's future.
An up round indicates that the company is continuing to grow and is moving in the right direction. In contrast, financing a down round is commonly viewed as a desperate attempt to raise money. As a result, a down round financing usually results in dilution for existing investors.
As a way to better comprehend this concept, we will look at an example of post-money valuation.
Example of Post Money Valuation
Let's say a company has a pre-money valuation of $10 M. Essentially, pre-money valuation refers to the valuation of a company before any investment.
An angel investor invests 2.5 M into the company, creating a post money valuation of 12.5 M. This makes the company worth $12.5 million after the investor has put money into it.
Post Money Valuation = Pre Money Valuation + Investment Amount
Post Money Valuation = 10M + 2.5M = 12.5M
As a result, the investor would own 20% of the company, since $2.5 million is one-fifth of the post-money valuation of $12.5 million.
Post Money Valuation Formulas
Post money valuation formulas are used to determine the value of a company after receiving an investment. They are used to calculate the worth of a venture after the money has already been raised.
There are 2 commonly used post money valuation formulas:
- Post Money Valuation = Pre Money Valuation + Amount of Cash Raised
- Post Money Valuation = Pre Money Share Price x (Original Shares Outstanding + New Shares Issued)
If the pre-money value is not known, then we use the following equation.
Post Money Value = Investment into the company/ Percentage of Ownership
Let's say an investor is willing to invest $10,000 for a 10% ownership stake in the company. Using the formula above, we can determine that the post money valuation is $100,000.
Post Money Valuation Calculator
A post money valuation calculator is a tool that can be used to calculate the value of a company after getting investments. It can be used to calculate the worth of your company depending on how much money has been invested in it.
Based on the investment amount and investor equity percentage, the tool calculates the pre-money and post-money valuation. It is an effective way of estimating the worth of your company when you are looking for investors.
Click here to download the Post Money Valuation Calculator Excel Sheet for free.