How Startup Valuation Works — Pre-Money vs. Post-Money Explained

What Is Startup Valuation?
Startup valuation refers to the estimated worth of a startup at a specific point in time. Early-stage startups are often valued based on:

Market size and opportunity

Founding team strength

Product development stage

User traction and revenue

Comparable deals and industry trends

Valuation isn’t just a number — it determines how much equity you give up when raising capital.

Pre-Money vs. Post-Money Valuation
🔹 Pre-Money Valuation:
The company’s valuation before new investment is added.

🔹 Post-Money Valuation:
The company’s valuation after the new investment is included.

Formula:

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

Example:
Let’s say:

Pre-Money Valuation: $4 million

Investment Amount: $1 million

Then:

Post-Money Valuation = $4M + $1M = $5 million

Investor Ownership = $1M / $5M = 20%

So the new investor gets 20% of the company, and the founders + existing shareholders are diluted accordingly.

Why It Matters
Dilution: Founders often underestimate how much equity they’re giving away.

SAFE/Note Conversions: SAFEs typically convert based on post-money terms, affecting ownership.

Cap Table Planning: Pre- and post-money directly shape how shares are divided.

Valuation and Ownership Table
Investment Pre-Money Post-Money Investor % Founder %
$500K $2M $2.5M 20% 80%
$1M $4M $5M 20% 80%
$1.5M $6M $7.5M 20% 80%

Factors That Influence Valuation
Revenue and profit margins

User growth and engagement

Market trends and demand

Competition and barriers to entry

Stage of product (MVP, beta, scaling)

Founder reputation and track record

Tools to Model Valuation and Dilution
Carta – Cap table management

Pulley – Modeling dilution scenarios

EquitySim – Early-stage simulations

AngelCalc – Valuation and SAFE calculator

Common Mistakes
❌ Confusing pre- and post-money when negotiating
❌ Not modeling dilution across multiple rounds
❌ Overvaluing too early (makes future rounds harder)
❌ Underestimating impact of SAFEs and convertible notes