Pre-Money Valuation
Pre-money valuation is the value placed on a company immediately before a funding round — the price the new investors agree the existing business is worth, before their money is added. Together with the amount raised it fixes the price per share and how much of the company the round buys: an investment of €5m at a €20m pre-money buys 20% of a company worth €25m post-money.
- Also known as
- Pre-money, Pre-money value
- Used at
- every priced equity round from seed to late stage; the number founders quote and the number that determines dilution
- Binding
- yes, once the term sheet's price per share is fixed and the shares are issued; the valuation itself is the negotiation, the price per share is the term
- Typical arithmetic
- post-money = pre-money + amount raised; new investors' stake = amount raised ÷ post-money; price per share = pre-money ÷ fully diluted shares before the round
- Typical trap
- whether the option pool is in the pre-money — an investor who requires a 10% pool "in the pre" has lowered the effective pre-money by 10%
- Parties
- the founders and existing holders, whose stake the pre-money protects; the new investors, whose stake it sets
How pre-money valuation works in practice
A fund offers to invest €8m at a €32m pre-money. The company is worth €40m after the money arrives, and the fund owns €8m of €40m — 20%. The founders and earlier investors, who owned 100% of the €32m, now own 80% of the €40m; their shares are worth the same, and they have been diluted by a fifth. The price per share is the pre-money divided by the number of shares in issue — and here the definitions matter, because "shares in issue" is negotiated: on a fully diluted basis, counting options and convertible instruments as if exercised, the price per share is lower and the fund gets more shares for its money.
The option pool is the usual battleground. An investor that wants a 10% unallocated pool after the round, and wants it created before the round, is asking the existing holders to fund it: the pool comes out of their 80%, not the investor's 20%. A "€32m pre-money with a 10% pool in the pre" is, for the founders, a €28.8m pre-money. Convertible notes and SAFEs converting in the round have the same effect: they take their shares out of the pre-money, diluting the founders rather than the new investor, unless the term sheet says otherwise.
For a fintech the pre-money also carries the licence and the regulatory capital: a term sheet that values the company before the round without noting that €3m of the round must be locked up as own funds is valuing a company that cannot spend the money.
Example
Founders own 100% of a payments startup: 8m shares. A fund offers €6m at a €24m pre-money, with a 12% post-round option pool created before the round and a €1.0m post-money SAFE at a €20m cap converting in the round. Post-money is €30m; the fund's 20% is fixed. The SAFE converts at its cap — 5% of the pre-round company, 4% after the round's dilution. The pool takes 12%. The founders are left with 64%: not the 80% the headline suggested, because the pool and the SAFE came out of their side of the pre-money. Had they negotiated the pool at 8% — enough for the hires actually planned before the next round — they would have held 68%: €1.2m of value at the round price, for one line in the term sheet.
Common mistakes
- Comparing pre-money valuations between term sheets without comparing the option pool and conversion terms behind them. - Founders optimising the pre-money number and accepting a preference or a ratchet that costs more at exit. - Not modelling the cap table before signing, and learning the founders' stake after. - Forgetting the fully diluted share count, so the price per share is a surprise. - Setting a pre-money the next round cannot clear, which turns the following round into a down round.