Pre-money and post-money are frequently used terms to describe the valuation of a company when raising capital. In this post, we provide an introduction to the concepts as well as explore the impact multiple rounds of funding have on the entrepreneur’s ownership stake. Many investors will ask you what is your company valuation, and they will confirm with you if this is Pre-Money or Post-Money. Sometimes they will use this “trick” do get a lower value, especially if they realize that you can not do the difference between pre-money and post-money.
Pre-Money Valuation vs Post-Money
The pre-money valuation of a company is simply the value of the company before an equity investment is made. The post-money valuation is the pre-money valuation plus the equity investment.
If you are asking for RMB 5million investment and you give 20% of shares to the new investors, the post-money valuation will therefore be RMB 25mio (5mio / 20%). The pre-money valuation will therefore be RMB 20mio (25mio – 5mio).
Imagine that when discussing you give your company valuation of RMB 20mio and the investor ask you if this is post-money valuation, then just by saying yes, you will lose 5 mio of valuation. Post-money RMB 20mio = 15mio RMB pre-money valuation.
Therefore, in practice when negotiating valuation with investor, it is recommended to mention clearly that you are are asking for pre-money valuation.