Finance:Post-money valuation

Post-money valuation is a way of expressing the value of a company after an investment has been made. This value is equal to the sum of the pre-money valuation and the amount of new equity. These valuations are used to express how much ownership external investors, such as venture capitalists and angel investors, receive when they make a cash injection into a company. The amount external investors invest into a company is equal to the company's post-money valuation multiplied by the fraction of the company those investors own after the investment. Equivalently, the implied post-money valuation is calculated as the dollar amount of investment divided by the equity stake gained in an investment.

More specifically, the post-money valuation of a financial investment deal is given by the formula [math]\displaystyle{ PMV = N \times P }[/math], where PMV is the post-money valuation, N is the number of shares the company has after the investment, and P is the price per share at which the investment was made. This formula is similar to the market capitalization formula used to express the value of public companies.

Example 1

If a company is worth $100 million (pre-money) and an investor makes an investment of $25 million, the new, post-money valuation of the company will be $125 million. The investor will now own 20% of the company.

This basic example illustrates the general concept. However, in actual, real-life scenarios, the calculation of post-money valuation can be more complicated—because the capital structure of companies often includes convertible loans, warrants, and option-based management incentive schemes.

Strictly speaking, the calculation is the price paid per share multiplied by the total number of shares existing after the investment—i.e., it takes into account the number of shares arising from the conversion of loans, exercise of in-the-money warrants, and any in-the-money options. Thus it is important to confirm that the number is a fully diluted and fully converted post-money valuation.

In this scenario, the pre-money valuation should be calculated as the post-money valuation minus the total money coming into the company—not only from the purchase of shares, but also from the conversion of loans, the nominal interest, and the money paid to exercise in-the-money options and warrants.

Example 2

Consider a company with 1,000,000 shares, a convertible loan note for $1,000,000 converting at 75% of the next round price, warrants for 200,000 shares at $10 a share, and a granted employee stock ownership plan of 200,000 shares at $4 per share. The company receives an offer to invest $8,000,000 at $8 per share.

The post-money valuation is equal to $8 times the number of shares existing after the transaction—in this case, 2,366,667 shares. This figure includes the original 1,000,000 shares, plus 1,000,000 shares from new investment, plus 166,667 shares from the loan conversion ($1,000,000 divided by 75% of the next investment round price of $8, or $1,000,000 / (.75 * 8) ), plus 200,000 shares from in-the-money options. The fully converted, fully diluted post-money valuation in this example is $18,933,336.

The pre-money valuation would be $9,133,336—calculated by taking the post-money valuation of $18,933,336 and subtracting the $8,000,000 of new investment, as well as $1,000,000 for the loan conversion and $800,000 from the exercise of the rights under the ESOP. Note that the warrants cannot be exercised because they are not in-the-money (i.e. their price, $10 a share, is still higher than the new investment price of $8 a share).

Versus market value

Importantly, a company's post-money valuation is not equal to its market value. The post-money valuation formula does not take into account the special features of preferred stock. It assumes that preferred stock has the same value as common stock, which is usually not true as preferred stock often has liquidation preference, participation, and other features that make it worth more than common stock. Because preferred stock are worth more than common stock, post-money valuations tend to overstate the value of companies. Will Gornall and Ilya Strebulaev provide the fair values of the 135 of the largest U.S. venture capital-backed companies and argue that these companies' post-money valuations are an average of 50% above their market values.

See also

• Pre-money valuation

External links

• Forbes Investopedia: What's the difference between pre-money and post-money?
• Ryan Roberts: What is a Pre-money and Post-money Valuation?
• Samuel Wu: Venture Capital 101 for Startups - Valuation
• Joseph W. Bartlett: A Missing Piece of the Valuation Puzzle

{{Navbox

| name = Private equity and venture capital

| state = autocollapse | title = [[Finance:Private equitPrivate equity and venture capital

| image = 
| bodyclass = hlist

| group1 = Basic investment types | list1 =

• Buyout
• Venture
• Mezzanine
• Growth
• Secondaries
• Equity co-investment

| group2 = History | list2 =

• History of private equity and venture capital
• Early history of private equity
• Private equity in the 1980s
• Private equity in the 1990s
• Private equity in the 2000s

| group3 = Terms and concepts

| list3 =

Buyout	Financial sponsor Management buyout Divisional buyout Buy–sell agreement Leveraged recapitalization Dividend recapitalization
Venture	Angel investor Business incubator Post-money valuation Pre-money valuation Seed money Startup company Venture capital financing Venture debt Venture round
Structure	Private equity firms and funds Limited partnership Limited liability company Carried interest Management fee Publicly traded private equity Business Development Company Venture capital trust Private investment in public equity (PIPE) Pledge fund

| group4 = Investors | list4 =

• Corporations
• Institutional investors
• Pension funds
• Insurance companies
• Fund of funds
• Endowments
• Foundations
• Investment banks
• Merchant banks
• Commercial banks
• High-net-worth individuals
• Family offices
• Sovereign wealth funds
• Crowdfunding

| group5 = Related financial terms | list5 =

• AUM
• Cap table
• Capital call
• Capital commitment
• Capital structure
• Distribution waterfall
• EBITDA
• Envy ratio
• High-yield debt
• IPO
• IRR
• Leverage
• Liquidation preference
• M&A
• PME
• Taxation of private equity and hedge funds
• Undercapitalization
• Vintage year

| below =

• Private equity and venture capital investors
• Private equity firms
• Venture capital firms
• Angel investors
• Portfolio companies

}}