Helping investors make a decision
One of the benefits of having solid pre and post-money valuations for your startup is that these values can help potential investors determine what percentage of your company they will acquire and retain. Some investors also prefer to use special assurances or warranties; for example, convertible notes delay evaluation until a later date (when the product gap is more apparent and the company is more mature).
Helping you explain your value
Another reason these values are so important is because they can help you negotiate funding for your startup. Pre-money and post-money valuations are a great way of explaining the mechanics of your business and showing you understand (and can communicate) your potential.
Giving your employees more information
Knowing your pre-money and post-money valuation numbers is also a great way to help your employees understand their stock options, attract new talent, and prepare your own plans for after acquisition.
Pre and post-money valuations – Frequently asked questions
Is a pre-money valuation more important than a post-money valuation?
No; both values are essential for startups and work together to determine your company’s value once the financing round is done. The pre-money valuation can, in fact, affect the post-money valuation. Both these values can also be used as shortcuts to calculate each other more easily – so they are equally essential for your business.
Do pre-money valuations impact financing?
Your determined pre-money value has a large impact on what size of ownership stake an investor might consider. This is because the PPS (price per share) that an investor is willing to pay is directly proportional to the pre-money value you have agreed on (if one goes up, the other goes down). Keep in mind that this value refers to the equity value of the business – not the share price.
If you’re looking to explore funding options, need working capital in between your funding rounds, or need some help determining the best financing option for your startup, don’t hesitate to get in touch.