Pre-Money Valuation : Definition, Examples, Formula
The pre-money valuation term is basically used in the startup’s valuation, venture capitalist, and Private equity.
However, A pre-Money Valuation is used for the company’s value or the Startup before it goes Public.
Pre-Money valuation is determined before any external funding or Financing.
Simply, the company’s pre-money valuation is determined by the worth of the Company before any investment or funding.
Additionally, The term Pre-money valuation is used by the investors especially by the venture capitalist and Investors who are not suddenly involved in the startup or a company.
Table of Contents
Basic Knowledge of Pre-money Valuation.
So as we read above, the company’s pre-money valuation determines the company’s actual worth before it raises any external funding by the investors or any venture capitalist. It shows the real worth or the rea; the money of the company or startup which gives the ideas to the investors of investing. But the Pre-money valuation can’t be static, it can vary over time. This means the exact value of the company or the start-up can’t be same over the time.
We can also determine the pre-money valuation; before the Public trade of the company or startup.
Calculation of the pre-money valuation is very simple. You can calculate your pre-money valuation in a second but to calculate the pre-money valuation you need to know about the post-money valuation of your company or startup.
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The formula of Pre-money valuation calculation
There are many misunderstand on the calculation of the pre-money valuation of the company or the startup. Here is the exact formula of pre-money valuation. So let’s see how to calculate the Pre-money valuation :
Pre-money Valuation of the company = post-money valuation of the company - Investment amount in the company.
So, let’s say if the company has a total of $30M Of post-money valuation and the investment amount is $7M then, according to the calculation the pre-money valuation of the company is $23M.
Example of Pre-Money Valuation
So, here is the example of the pre-money valuation, Let’s say a man Name Rahul has it’s all shares and profits of the company. He wants some venture capitalist or Investors to invest in his company but before Investing he has 100% Owned profit with the $20M and he also has 400,000 shares
So, let’s say the Investors or the venture capitalist agree to invest $5 Million in the company but in exchange for 20% Stakes or the shares of the company.
Furthermore, the Pre-money valuation before the Investing is $20M, and the Post money valuation will be $25M.