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The number of tech unicorns (companies valued at over $1B) keeps growing. As of the end of 2020, 77 unicorns have received financing on AngelList alone. But when you hear a startup knighted as the latest “unicorn,” what’s actually being discussed is often left unsaid.
Saying a startup is worth $1B can mean any number of things. Most often it’s interpreted to mean that the startup has a post-money valuation of at least $1B.
In this guide, we’ll show how post-money valuations are determined and explain why post-money valuations are useful to investors.
A post-money valuation is a company’s estimated value after receiving outside investment or financing. So if a company was worth $10M, and then it raised another $5M, its post-money valuation would now be $15M.
Post-Money Valuation = Pre-Money Valuation + Investment Amount
This doesn’t mean the company has $15M in the bank. It means that investors believe that—at its current trajectory—the company is worth at least $15M including the money raised, and they’ll receive a nice return on their investment if and when there’s a liquidation event.
The post-money valuation will follow a company after it raises a round and be seen as a key indicator of the company’s performance. If the post-money valuation increases after subsequent financing rounds, the startup will usually be more able to attract future investors and employees.
On the other hand, if the post-money valuation decreases from the previous round—known as a “down round”—it could signal the company is in peril. In a world where everybody wants a seat on the next rocket ship, post-money valuations can have serious reputational consequences.
But there are also practical reasons for knowing the post-money valuation. To understand its usefulness, we first need to understand the post-money valuation’s counterpart: the pre-money valuation.
The pre-money valuation can’t be determined with a simple math equation. That’s because it’s open to interpretation and debate between investors and founders.
The pre-money valuation is the value of a company absent any new outside investment or financing. It’s what both the investors and founders think a company is worth—and they often have differing opinions. In terms of timing, a pre-money valuation is measured before any money is raised, while a post-money valuation assumes the close of the round.
For early-stage investments, pre-money valuations are especially tricky because the company might not have a lot of financial data to go off of. Therefore, investors' valuations are informed by comparable businesses in the same industry, the size of the market, the founders and team, the amount of interest in the deal, and a host of other factors.
Investors should pay attention to the language founders use when talking about their company's valuation. If they say they’re looking to raise $2M at a $6M post-money valuation, what they’re actually saying is their pre-money valuation is $4M.
But if a founder is raising $2M at a $4M post-money valuation, it means their pre-money valuation is only $2M.
This nuance has important implications when it comes to investors’ ownership stake.
To learn more, read our guide to pre-money valuations.
One of the primary functions of a post-money valuation is to determine what percentage of the company the investor is purchasing.
When you know the post-money valuation, you can divide that amount by how much you invested in the company, to determine how much equity you’ll be receiving.
Amount Invested ÷ Post-Money Valuation = % of Equity
Going back to our previous example, if you invested $500k into a company at a $6M post-money valuation, your equity stake is 8.3% ($500k ÷ $6M = 8.3%).
The post-money valuation can also be used by founders to determine how much of their ownership they need to dilute to raise the capital they need.
Say you need to raise $2M at a $6M post-money valuation and you have 1M shares outstanding. This would mean each share is worth $4 ($4M ÷ 1M). If you need another $2M, and each of your shares is valued at $4, you would need to issue another 500k shares ($4 x 500k = $2M).
Issuing 500k new shares would increase your number of outstanding shares to 1.5M. Selling those 500k shares would mean selling a 33.33% stake in your business (500k ÷ 1.5M = 33.33%), thereby diluting your ownership stake down to 66.67%.
If you know how much a company raised and the amount of equity they had to sell, you can determine the post-money valuation simply by dividing the investment amount by the equity stake. So if I sold 10% of my company on a post-money basis to raise $2M, the post-money valuation of my business would be $20M ($2M ÷ 10% = $20M).
Note that the individual share price of a company is generally determined at the pre-money. If the pre-money valuation of my company at seed was $3M with 1M shares outstanding, and it grew to $9M with 1.5M shares outstanding at Series A, it would mean the share price jumped from $3 to $6 ($9M ÷ 1.5M).
Whatever my post-money valuation is, it’s still based on the share price determined using the original pre-money valuation. The post-money valuation is representative of the total equity value of the company.
If you want to find post-money value from pre-money share price, use the following formula:
Post-Money Value = Pre Money Share Price x (Original Shares Outstanding + New Shares Issued)
So if I had 1M shares outstanding and issued another 500k at a $3 share price, it would mean my post-money valuation is $4.5M (1M + 500k x $3).
Knowing the post-money valuation can help you determine a lot of important business metrics. The problem is, post-money valuations are rarely ever as straightforward as a simple math equation.
That’s because startups raise money in a myriad of different ways, such as equity financing, SAFEs, or convertible debt. When SAFEs or convertible debt are involved, it might be because the investors and founders couldn’t agree upon a pre-money valuation—making it hard to know what the post-money valuation looks like.
Valuation caps (a limit on the price at which convertible debt can become equity) and anti-dilution provisions can further muddy the waters.
It can take some sleuthing to figure out an accurate post-money valuation, but it’s an important metric for determining the value of your investment.