Understanding Pre-Money vs. Post-Money Valuation in Startup Funding
📘 What Is Pre-Money Valuation?
Pre-money valuation refers to the value of a startup before new investment is added. It’s the estimated worth of the company based on its current assets, team, traction, intellectual property, and future potential.
📌 Example: If a startup is valued at $5 million pre-money and raises $1 million, the post-money valuation is $6 million.
📗 What Is Post-Money Valuation?
Post-money valuation is the company’s value after investment is included.
📌 Formula:
Post-money valuation = Pre-money valuation + New investment
This number is crucial for investors because it determines the percentage of ownership they receive.
📊 Dilution: Why This Matters for Founders
Valuation affects how much of the company you’re giving up in exchange for capital.
🧮 Example:
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Pre-money valuation: $4M
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New investment: $1M
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Post-money: $5M
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Investor receives: $1M / $5M = 20% equity
The lower the pre-money valuation, the more dilution founders face.
🔍 Pre-Money vs. Post-Money — Key Differences
| Feature | Pre-Money Valuation | Post-Money Valuation |
|---|---|---|
| Calculated Before or After Investment | Before | After |
| Used By | Founders, early stage | Investors, cap tables |
| Affects Dilution? | Yes | Yes |
| Importance | Sets baseline valuation | Determines equity split |
💬 Why Confusion Happens
Founders and investors often talk past each other because one references pre-money and the other post-money.
👉 This miscommunication can lead to unexpected dilution or misaligned expectations.
To avoid surprises:
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Be explicit about which valuation is being used
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Clarify if investment is included
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Get all parties aligned on definitions
🧠 Pre-Money in Convertible Notes and SAFEs
With convertible notes and SAFEs, the conversation shifts. These instruments often don’t set a valuation upfront, but use a valuation cap that acts like a post-money or pre-money metric.
Y Combinator’s updated SAFE is post-money based, which makes dilution easier to model for founders but can result in giving up more equity than expected.
🔗 Learn more: Y Combinator SAFE Guide
📉 Common Mistakes to Avoid
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Assuming a valuation includes new funds when it doesn’t
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Miscalculating equity % from a pre-money figure
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Failing to model cap table scenarios properly
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Not updating legal docs or investor agreements with the correct terminology
📁 Tools for Modeling Valuation
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Carta – Cap table and equity modeling
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LTSE Equity – Founder-friendly equity tools
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AngelList – Fundraising and valuation guidance