What Is Pre-Money Valuation?

Pre-money valuation refers to the estimated value of a company before it receives new capital from investors by going public or from external fuওnding or financing.

The term is often used by 澳洲幸运5官方开奖结果体彩网:venture capitalists and other investors who aren't directly involved in a company. A pre-money valuation in combination with their potential investment amount allows them to determine what their❀ share in the company would be.

Pre-money valuation is often referred to as "pre-money."

Understanding Pre-Money Valuation

Pre-money is the value of a company before it receives investments or rounds of 澳洲幸运5官方开奖结果体彩网:financing. It gives investors a picture of what the company's current value mಌay be.

Pre-money isn't necessarily a static figure. It changes over time as new funding is sought. That's because the valuation is determined before each new round of financing (whether that's private or public investment).

For example, pre-money would be determined before an 澳洲幸运5官方开奖结果体彩网:initial public offering (IPO). It would also be figured before seed, angel, or venture capita♛l funding is put into a company, either initially or over tim🙈e if the company seeks additional funds.

Determining Pre-Money Valuation

Before receiving any funds, a company can estimate its pre-money valuation based on financial statement dat𒈔a, scalability, the value of comparable businesses, the state of the industry, conditions in the relevant market, the potential seen in the senior management team, and more. Or, the pre-money valuation may be a figure proposed by a potential investor.

The leadership of a company might reject pre-money valuations proposed by others until they reach an amount that's in line with the calculations and aspirations of the company.

Calculation

Once a company receives funding, its value includes that money. This is known as a 澳洲幸运5官方开奖结果体彩网:post-money valuation. Co🌠nsequently, g♉oing forward a pre-money valuation is determined by subtracting potential new funding opportunities from the post-money valuation:

Pre-Money Valuation = Post-Money Valuation - Investment Amount

So a company whose post-money valuation is $20 million after receiving a $3 million investment has a pre-money v𒅌aluation of $17 million ($20 million - $3 mill👍ion).

How a Pre-Money Valuation Is Used

A company can use a pre-money valuation as a clear starting poi🔴nt for finding and ne🧔gotiating with initial investors, or additional ones at a later time. The higher the pre-money valuation, the more interested investors may be.

In addition, would-be investors use the pre-money valuation to determine their potential ownership stakes or the amount of money they may choose to invest in exchan𝕴ge for a certain ownership percentage.

The pre-money valuation is also used to determine the per-share value of shares to be sold to the public (pre-money ÷ total number of shares).

Types of Pre-Money Valuations

Tw༺o common pre-money valuation methods used ❀by companies and investors to determine whether a potential investment is worthwhile are:

1. Discounted Cash Flow (DCF): DCF helps companies and investors understand the value of a potential investment by analyzing projected future🔥 cash flows.

Investors can use DCF to determine theꦓ amount of money they may receive by investing in a company. And if the 𓆏DCF is greater than a potential investment, then the investment may be worthwhile.

2. 澳洲幸运5官方开奖结果体彩网:Comparable Company Analysis (CCA): CCA compares competing companies in the same i🎀ndustry with similar objectives and of similar size. To make this comparison, it uses such measurements as price to earnings (P/E), price to book (P/B), price to sales (P/S) and enterprise value to sales (EV/S).

Should the company being evaluated have ratios that are higheꦏr than its competitors, it can be seen as overvalued. This can affect how investors negotiate with a company, what they seek in return for their funding, or whether they invest at all.

Special Considerations

Early Valuations

Early stage valuations can coincide with the company being pre-revenue, meaning it has yet to generate any sales. This may be because it doesn't have a product on the market yet.

Investors can still determine the company's value, basing it on a variety of other factors. One such measure may be comparable businesses, as noted above. An assessment of the revenue and 澳洲幸运5官方开奖结果体彩网:market value of m♈ore establis꧋hed, mature companies with a similar focus and operational approach can serve as a gauge of the potential for pre-money companies.

Even if pre-money companies claim that they are creating an entirely new industry with new 澳洲幸运5官方开奖结果体彩网:business models, their prospects will likely be cast in the ve🧔in of an earlier business. For example, if a new company plans to produce a new type of automated vacuum cleaner, its pre-money valuation might be established in part by assessing the performance of other makers of robot vacuums.

Other factors that may contribute to a pre-money valuation include the🐲 experience and track record of its founders and leadership executives, the feasibility of delivering on promised services, and 🌼the challenges that may be posed by competitors.

Example Using Pre-Money Valuation

Jim's Donut Shop is a thriving business with several locations in the region. The owners want to capitalize on their success by branching out with an additional shop and new product offerings. But it needs to attract new investors to do so.

A pre-money 🏅valuation in conjunction with a potential investment amount will show the equity ownership an investor can expect.

The company determines its pre-money valuation based on its financial statement information, ongoing d🦂emand for its products, economic conditions and⛎ outlook, competition, and high quality leadership.

The owners can benefit from ༺an attractive (high) pre-money valuation because it would mean giving up a smaller percentage of ownership, should the investment take place.

Jim's Donut Shop has a pre-money valuation of $5 million. There's a potential $1 million investment on the table:

• Investment: $1,000,000
• Pre-money valuation: $5,000,000
• Post-money valuation: $6,000,000 ($5,000,000 + $1,000,000)
• Ownership percentage: ($1,000,000 ÷ $6,000,000) = .17 x 100 = 17%

So, in exchange for the $1 million investment, the owners of Jim's Donut Shop would forego 17% of their ownership stake.

Pre-Money vs. Post-Money Valuation

Post-money valuation is different from pre-money because it indicates how much a com♒pany is worth after it receives an investment. The post-money valuation is the total of the pre-money plus the additional equity injected into the company.

This includes any amount of capital, whether it's raised through a public offering or through prꦿivate, external sources.

So, if a company's pre-money valuation is $25 million and it receives $5 million from an investor, the post-money valuation is $30 million.

Post-money valuation is an important figure because it's a more accurate rendering of value and investors can use it to negotiate their share of equity if they invest in a company. A potential equity share can also be calculated using the pre-money valuation, as noted in the example above.

The Bottom Line

Pre-money valuation is a term that refers to the value of a company before accounting for outside investments. It's a figure that can be used to attract investors, determine an ownership stake for an investor, and determine the per-share value of shares to be offered for sale. Investment amounts plus a pre-money valuation add up to a post-money valuation for a company.