Post-Money Valuation: Definition, Example, Formula
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Post Money Valuation: Definition
A post-Money valuation can be defined as the total worth of the company or a Startup after the external funding from the Venture capitalist or Angel Investors.
Post-Money valuation is the approximate or total market value of the company or the startup after the Funding from the Investors.
Valuation after funding is typically known as the Post Money Valuation.
The Post money Valuation is the pre Money valuation plus the Funding raised by the company.
The post-money valuation is always higher than the Pre-money valuation.
Basic Knowledge of the Post Money Valuation
Many investors or Ventures Capitalist invest in the company by seeing the pre-money valuation and injecting the capital in the exchange of equity or Funds.
For example, a company has a Pre-money valuation of $100M, and some investors invest $25M in the company in the exchange of the equity and Fund; This investment of $25M makes the company total worth of $125M ($25M by external funding). In this scenario, the Investors can ask for 20% Stakes of the company in exchange for Captial. As $25M is one-fourth of the total post-money valuation of the company.
Post Money valuation Versus Market Value
The post Money valuation of the company can never be equal to the Market value of the company.
The formula of Post Money valuation is not including the stock option which means it is not relatable to the Market at any cost.
It accepts that favored stock has a similar worth as normal stock, which is typically false as favored stock regularly has liquidation inclination, investment, and different highlights that make it worth more than normal stock.
Since favored stocks are worth more than normal stock, present cash valuations tend to exaggerate the worth of organizations.
Post-Money Valuation Formula
Many peoples have a question on how to calculate the Post Money valuation or what is the Formula of the post Money valuation?
Post Money valuation has the formula related to Pre-money Valuation which is
Post Money valuation of the company= Pre Money valuation + External investment by the Investors.
Example of Post Money Valuation
Therefore After the Investment, the New post-Money Valuation of the company is $250M. Furthermore, the Investors get the 20% Stake in the Company in exchange for Investing.
Benefits of Post-Money Valuation
When we talk about the Valuation of the company there are many benefits of Post Money valuation like:
- You can easily calculate what shares are being sold in the business
The function of the post-money valuation is to find out or calculate what percentage of the company is sold to the Investors in the Exchange for Fund. if you know the Pre-money valuation and Investment money you can easily find out the Post money valuation. After getting the value of the post-money valuation then divide the post-money valuation by the Investment. You will get the number of equity Investors received in the deal.
- Calculate the net worth
The easiest method to calculate the worth of the founder of the owner of the company is by the post-money valuation.
- Motivating Employee
Numerous venturesome representatives are drawn too quickly to develop new businesses that issue investment opportunities as a feature of their pay. Representative investment opportunities have a strike value attached to the post-cash valuation. Workers with a strike cost of $17.50 per share can’t execute their alternatives if the post-cash valuation cost per share is just $12.
- It can attract Investments and Partnerships
No doubt the higher the value the higher the opportunity of investment or of the partnership. Numerous assets can’t take a gander at you except if you have a speculation valuation over a specific sum. It just wouldn’t affect their complete returns.
Also, huge public organizations that would close the entryway in your face on the very first moment will require another glance on the off chance that you have a $50 million post-cash valuation.
- Measure business achievement
As your business develops, you’ll most likely have to collect new adjusts of cash for various benchmarks. On the off chance that the pre-cash valuation of another round is over the post-cash of the earlier, it implies financial backers are esteeming your organization more.
Importance of Post-Money Valuation
In ensuing rounds of financing of a developing privately owned business, weakening turns into an issue. Cautious authors and early financial backers, to the degree conceivable, will take care in arranging terms that offset new value with worthy weakening levels.
Extra value raises may include liquidation preferences from preferred stock. Different sorts of financing like warrants, convertible notes, and investment opportunities should be thought of, if pertinent, in weakening estimations.
In another value raise, if the pre-money valuation is more prominent than the last post-money valuation, it’s anything but an “upcycle.” A “down round” is the inverse, when pre-money valuation is lower than post-money valuation.
Organizers and existing financial backers are finely sensitive to here and there adjust situations. This is on the grounds that financing in a down round normally brings about weakening for existing financial backers in genuine terms. Accordingly, financing in a down round is frequently seen as to some degree frantic with respect to the organization.
Financing in an up round, be that as it may, there is less hesitance as the organization is viewed as developing towards the future valuation it will hang on the open market when it ultimately opens up to the world.
There is additionally a circumstance called a level round, where the pre-money valuation for the round and the post-money valuation of the previous round are generally equivalent. Likewise, with a down round, investors as a rule prefer to see indications of an expanding valuation prior to placing in more money.