Friday, January 25, 2008

Startups: Valuation Terminology

After reading my post on Zillow's valuation, someone asked me what I meant by post-money valuation.

There are two ways to express startup valuation at the time of an influx of new funds - pre-money and post-money.

Suppose your firm gets $10 million of funding in exchange for a 25% equity stake. This means that 25% of your company is worth $10 million, or that your whole company is worth $40 million. This is called the post-money valuation.

To figure the pre-money valuation, subtract the funding amount from the post-money valuation (Why? Because the funding has increased the value of your company by exactly the amount of cash that has come in). For the above example, the pre-money valuation is $30 million.

In general, you can figure out the pre-money valuation by first figuring out the post-money valuation, then subtracting all new funds that have come in. There are more complicated scenarios where the pre-money valuation can be slightly different from the example above (e.g.if the funding event triggers the exercise of options, conversion of notes, or other changes in the existing funding structure of the company). In general, though, it's the post-money valuation that matters for everyone except the people who are invested in the company.

Hope that clears it up.

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