You may have heard these terms bandied about.
Startup valuations are hard enough without some jargon to muck up the waters even more.
Fortunately, these terms are about as simple as it gets, once you learn the math.
Let’s put this in the context of a startupper named Casimir. Casimir has come up with a new Internet router technology that he’s sure will either be bought by Cisco within 2-3 years, or bankrupt them within ten. Hey, we entrepreneurs are nothing if not brobdingnagingly optimistic.
Casimir kills it at the Tri State Angel Investor Dinner PitchPalooza. Calls flood in the next day over the VOIP network powered by, what else, his new router. One Angel in particular seems like a great fit, and after a couple discussions, they’re ready to talk turkey. The investor says he’s willing to invest $1 million at a $5 million valuation. Casimir quickly crunches the numbers, and realizes that the investor would get 20%. So far, so good.
But then the investor says “And to confirm, this is pre-money.” No entrepreneur wants to reveal that he doesn’t know a basic investing term, so Casimir responds “Of course!”
Was he right to do so? Or was there some pooch screwing here?
He was right.
In the example above, the investor would get 20% of the company, because he’s saying that the company is worth $5 million, so if he invests a fifth of that amount, he gets a fifth of the company ownership. That is the pre-money valuation. Simple as that.
The post-money valuation is just the pre-money valuation, plus, yep, the money. So in this case it’s $5 million plus $1 million = $6 million.
That’s it. Valuations are often the most difficult part of negotiations with a potential investor, but this terminology doesn’t have to be.
