Company value before adding new investment capital
Pre-money valuation is the value assigned to a company before a new round of investment is added. It is agreed through negotiation between the company and investors, informed by the methods described on the startup valuation page. Once agreed, it is used to calculate the price per share, which then determines how many new shares the investor receives for their money.
Calculating share price from agreed company value
A company agrees a pre-money valuation of 8,000,000 and has 8,000,000 fully diluted shares outstanding before the round. The price per share is 8,000,000 divided by 8,000,000, which is 1.00 per share. An investor putting in 2,000,000 at this price receives 2,000,000 new shares, giving a post-money valuation of 10,000,000 and an investor stake of 2,000,000 divided by 10,000,000, which is 20%.
| Item | Value |
|---|---|
| Pre-money valuation | 8,000,000 |
| Pre-round fully diluted shares | 8,000,000 |
| Price per share | 1.00 |
| New investment | 2,000,000 |
| New shares issued | 2,000,000 |
| Post-money valuation | 10,000,000 |
| Investor ownership | 20% |
Things to check in the pre-money number
- Confirm whether an option pool top-up is included in the pre-money share count, since this reduces the effective valuation for founders.
- Check whether any convertible notes or SAFEs from earlier rounds convert into shares as part of the pre-money share count.
- Compare the pre-money figure against comparable recent deals, not just against the company's own prior valuation.
- Remember that a headline pre-money number is only meaningful alongside the fully diluted share count used to calculate it.
Questions on reading a pre-money number
- Does pre-money valuation include the option pool?
- It depends on the term sheet. Many investors require the pool top-up to be included in the pre-money share count, which effectively lowers the value founders capture from the headline number.
- How is pre-money valuation different from post-money valuation?
- Pre-money is the value before new investment; post-money is pre-money plus the new investment amount.
- Can pre-money valuation be negative in effect?
- No, but a very low pre-money valuation relative to prior rounds is called a down round, and it usually triggers anti-dilution protections for earlier investors.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.