Venture Capital Economics

What is a Pre-Money Valuation?

A pre-money valuation is what a startup is believed to be worth prior to raising a round of funding.
This is some text inside of a div block.
This is some text inside of a div block.


  • The pre-money valuation is the value of a company before any new outside investment or financing.
  • Pre-money valuations are subjective, and can be based on a company’s financials, comparable exits in the market, and the makeup of the founders and team.
  • The pre-money valuation generally dictates the share price of a startup and the ownership stake an investor will receive based on the amount of capital they put in.


Pre-money valuations form the basis of all VC negotiations. They’re the key number all sides must agree upon for a funding round to move forward. For angels investing at the seed stage, being able to interpret the pre-money valuation can help you separate good deals from the bad ones.

This guide will examine how VCs determine pre-money valuations, the math behind a pre-money valuation, and how a pre-money valuation influences an investment round.

But first, let’s explain just what pre-money valuation means.

What is a Pre-Money Valuation?

A pre-money valuation is the value of a company before a new outside investment. Pre-money valuations generally form the basis of what a VC’s share in the company is determined to be worth, based on how much they invest.

If I invest $250k in a company that has a pre-money valuation of $1M, it means I own 20% of the company after the investment: $250k / 1.25M = 20%.

Because the pre-money valuation is determined before each round of financing, it will likely change over time. So a company may have a pre-money valuation at seed that’s $3M, but after it’s grown, its Series A pre-money valuation may be $9M.

There’s no hard-and-fast rule around how the pre-money valuation is determined. Often, it’s open to interpretation by both the VC and founder based on the company’s performance, the market they operate in, competitors in the space, and a host of other factors. 

With that in mind, let’s look at how pre-money valuations are agreed upon.

Determining the Pre-Money Valuation

Paul Graham once wrote that there’s “no rational way to value an early-stage startup.” That’s because seed-stage companies typically have very few financial indicators to go off of. In some cases, they haven’t even brought a product to market yet.

So what’s an angel investor to do?

There are a few metrics investors use when proposing a pre-money valuation when financials are not readily available. They are as follows:

  • Comparable businesses. You’ll often hear VCs refer to a company as “the next [INSERT NAME OF SUCCESSFUL STARTUP HERE].” This is based on a comparison of the company to other more established companies in the marketplace. They’ll measure the revenue and market value of more mature companies as a gauge of a startup’s potential.
  • Founders and team. When it comes to picking winners at early-stage, Paul Graham places a lot of stock in “good” founders. He defines good founders as people who “make things happen the way they want…have a healthy respect for reality…and are relentlessly resourceful.” Founders who have a successful track record of launching new companies and have assembled a team of smart people around them appeal to VCs.
  • Deal interest. If a lot of investors want in on a deal, the founders have leverage and can drive up the valuation of the company—allowing them to retain more ownership. But if a deal is undersubscribed (i.e., low demand), the investors have the power to dictate the valuation of the company.

Pre-Money Valuation vs. Post-Money Valuation

You’ll often hear pre-money valuation and post-money valuation used together—so it helps to understand the difference between the two. Fortunately, the post-money valuation is straightforward to understand: It’s the pre-money valuation plus the additional capital injected into the company during the fundraise.

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

So if I have a pre-money valuation of $4M and I raised an additional $2M, my post-money valuation is $6M. Simple.

If you hear a founder say they’re raising $2M at a $6M post-money valuation, what they’re really saying is their company is currently valued at $4M. 

The post-money valuation helps investors understand their ownership stake after they invest in a company. For instance, if you invest $500k in a company at a $2M pre-money valuation, your equity stake in the company is 20% (as $500k is 20% of $2.5M).

However, if you invest $500k at a $2M post-money valuation, your equity stake is 25% (25% = $500k of $2M). Therein lies the subtle difference in pre- and post-money valuations. Listen closely to whether founders use pre-money or post-money valuation, as this will suggest two very different measurements of the value of their business, and thus your potential ownership stake.

To learn more, read our guide on post-money valuations.

Pre-Money Valuation and Deal Terms

Pre-money valuations impact a lot of other deal terms

Because the pre-money valuation is open to interpretation, investors typically request preferred shares in the company as a safeguard against overvaluation. Preferred shares give investors several potentially important benefits, including a liquidation preference, participation rights, and anti-dilution rights.

Because of these rights, preferred shares are generally more valuable than common stock held by founders and employees.

If the founders and investors can’t agree on a pre-money valuation and there is still investment interest, the founders might issue convertible notes to investors. Convertible notes amount to a loan offered by investors that can convert to preferred stock at a later funding round when a valuation may be easier to determine.

SAFEs are also popular with early-stage investors. With a SAFE, investors generally will convert at a discount or valuation cap at the next equity financing. To learn more, read our guide to SAFEs.

How to Calculate the Pre-Money Valuation

Say I start a company that sells widgets. After a year of growth, I decide to raise a seed round to scale the business. My co-founder and I own 100% of the company with 1M shares outstanding.

We’re seeking $1M at a $3M post-money valuation. In other words, the pre-money valuation is $2M. This being the case, each individual share of the company is worth $2 ($2 x 1M = 2M). In order to raise another $1M, I’ll need to issue an additional 500k shares ($2 x $500k = $1M).

This means I'm giving up a 33% equity stake in the company in exchange for an additional $1M in financing. 

After performing your due diligence, you decide to invest $500k in my company, netting you 250k shares. This gives you a 16.67% ownership stake in my widget business ($500k ÷ $3M = 16.67%).

The Art of the Pre-Money Valuation

Pre-money valuations are subjective, meaning the negotiation process is key. Negotiate well and you may end up owning a sizable portion of a company with enormous potential. 

Of course, you don’t want to strong arm founders into an unfair valuation, as this can get a relationship started on the wrong foot. 

As an angel investor, keep in mind that you’re likely to be diluted in future funding rounds as the pre-money valuation grows and larger VCs get involved. This isn’t necessarily a bad thing. As a company’s pre-money valuation increases, the price per share goes up.

Say my widget business went on to raise a Series A at a pre-money valuation of $9M. Assuming no further shares were issued, this would mean your 250k outstanding shares would now be worth $6 each. Said another way, your $500K investment would now be worth $1.5M.

Matthew Speiser
Writer, AngelList
Kate Bridge
Legal Counsel, AngelList
Maria LoPreiato-Bergan
LP Relations, AngelList
Jim Tomczyk
GP Relations, AngelList
Invest in Startups on AngelList
Get started
AngelList Venture Help Center
Questions about AngelList products and services? Visit our Help Center.

Keep learning

Get started with AngelList educational articles in your inbox.

Thank you, we'll be in touch soon.
Oops! Something went wrong while submitting the form.
Was this article helpful?
AngelList Venture Help Center
Questions about AngelList products and services? Visit our Help Center.