Post-money valuation is a company’s estimated worth after outside financing and capital injections are added to its balance sheet. This valuation includes the recent round of funding, such as the injection of equity capital, and it can impact the company’s share price.
It is calculated by adding the new equity investment to the pre-money valuation (the company’s worth before the new investment or financing was added). So, if a company’s pre-money valuation was $10 million, and it raised $2 million in a new round of funding, the post-money valuation would be $12 million.
Post-money valuation is an important metric for investors as it provides a snapshot of a company’s value at the time of the investment. The post-money valuation can also determine an investor’s equity stake in the company, as their percentage ownership is calculated by dividing the amount of their investment by the post-money valuation.
It’s important to note that post-money valuation is not a static metric—it changes every time a company receives a new round of financing.
Example of Post-Money Valuation
Let’s take an example of a start-up company called “Tech Innovators Inc.”
Suppose Tech Innovators Inc. is in talks with a venture capital firm for funding. After negotiations, they agree that the pre-money valuation of the company is $5 million. This means that the value of the company, before the venture capital firm’s investment, is estimated to be $5 million.
The venture capital firm then decides to invest $1 million into the company. This investment increases the company’s total valuation to $6 million, which is the post-money valuation ($5 million pre-money valuation + $1 million investment).
So, after the investment, the post-money valuation of Tech Innovators Inc. is $6 million. The venture capital firm’s ownership percentage in the company is then calculated as their investment divided by the post-money valuation, or $1 million / $6 million, which is approximately 16.67%.
This means that the venture capital firm now owns a 16.67% stake in Tech Innovators Inc., and the original owners retain the remaining 83.33%.