How do you calculate pre-money and post-money valuation?
Short Answer
Pre-money valuation is the company's value before investment; post-money equals pre-money plus the investment amount. If a company raises £2M at a £8M pre-money valuation, post-money is £10M and the investor owns 20%.
Full Explanation
Pre-money and post-money valuation are fundamental concepts in startup financing that determine how much of the company investors receive for their investment. The relationship is simple: Post-Money Valuation = Pre-Money Valuation + Investment Amount. The investor's ownership percentage equals Investment Amount divided by Post-Money Valuation.
For example, a startup with a £8 million pre-money valuation raising £2 million has a £10 million post-money valuation. The investor receives 20% ownership (£2M / £10M). If the same company had negotiated a £12 million pre-money valuation for the same £2 million investment, the post-money would be £14 million and the investor would receive 14.3% — significantly less dilution for the founders.
The pre-money valuation is the negotiated number that reflects the company's current worth based on traction, market opportunity, team, and competitive dynamics. It is the primary lever in investment negotiations. The option pool is a critical detail: investors often require that an employee option pool (typically 10-20%) be included in the pre-money valuation, effectively diluting existing shareholders before the investment. If the £8 million pre-money must include a pool equal to 15% of the post-money, the pool is worth £1.5 million at the round price (15% of £10 million), so the shares that existed before the round are effectively priced at £6.5 million.
For convertible instruments (SAFEs and convertible notes), the distinction matters at conversion. A post-money SAFE with a £5 million cap means the investor's ownership is calculated on a £5 million post-money basis — their percentage is known at investment. A pre-money cap means the investor's final percentage depends on how much other capital converts alongside them. Y Combinator's current standard SAFE uses post-money caps for this reason — clarity for all parties.
Our comparison of pre-money vs post-money valuation sets out the formulas, the option pool shuffle and a worked cap table that reconciles to the share.
Related Glossary Terms
Related Questions
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Further Reading
Pre-Revenue Startup Valuation: Intangible Asset Methods That Actually Work
Pre-revenue startups are notoriously difficult to value using traditional methods. Revenue multiples fail when there is no revenue. DCF models rely on projections that are mostly fiction. Intangible asset valuation offers a third path — grounded in what a startup has actually built, not what it hopes to earn.
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