Are you an HR/finance professional looking to understand post-money valuation? Perhaps a founder looking for answers about conducting post-money valuation within your company?
Whether you're an entrepreneur or part of the organization, understanding post-money valuation will give you the best idea about your company’s worth after external investments. This metric will help you gauge your company’s growth potential and make strategic decisions.
We know that understanding and calculating the concept can be a daunting task.
But don’t worry, we’ll break it down in the simplest way possible.
Let’s get started.
Post-money valuation is the worth of a startup after an investment round wherein funding is received by an angel investor, a venture capitalist , or any other investor.
Post-money valuation is derived once the pre-money valuation is done i.e. the valuation of the company previous to fresh funding is calculated.
Speaking of valuation, it is a tentative or hypothetical concept. Founders and existing investors want the valuation to be high because this will imply that the startup's idea, service, or product is promising. On the other hand, any new investor will want a comprehensive assessment of the startup's performance and capabilities before they invest their money into it.
Get insights on its importance, influencing factors, risk mitigation strategies, and more.
A high post-money valuation showcases investor confidence and positions your company for further success, while a lower valuation can provide valuable insights for course correction.
Coming back to post-money valuation, simply put, it is the value of the pre-money valuation plus the additional amount invested by new investors.
But, why is post-money valuation important?
Let’s see why.
Not understanding why post-money valuation is important and jumping the gun and conducting one for your company is like driving without a map.
You will neither understand what the numbers denote nor know where the loopholes lie.
Here is why post-money valuation is important for an organization:
Tip! Maintain a cap table management software to simplify data analysis pre and post-valuation.
Using a software will offload a lot of your routine work that requires you to edit numbers for different investors and ESOP holders. It also gives you an overview of outstanding shares, diluted shares, amount raised, and valuation. This enables you to get a quick glance at your existing share allocation and values in real time.
You must be wondering how to calculate post-money valuation. We’ll delve into it next.
Let’s keep this straightforward.
The post-money valuation can be calculated in two ways:
You can apply either of the post-money valuation formula and calculate the valuation effectively.
For example, let’s take the first method to calculate the post-money valuation of a company.
Suppose a company was valued at $50 million. An investor decides to fund it with $10 million.
Here, the post-money valuation would be:
Pre-money valuation + Fresh funding → $50 million + $10 million → $60 million.
Next, let’s understand how post-money valuation and equity ownership work with the help of an example.
Assume a company has a pre-money valuation of $10 million. An angel investor invests $2 million into the company. The post-money valuation after this funding injection will be $12 million.
In such a scenario, the investor would secure a 16.6% equity in the organization.
How? Let's quickly do the math.
% of Equity = Amount Invested ÷ Post-Money Valuation
= $2 million ÷ 12 million
So, for the above example, the equity of the new investor would be 16.6%.
Knowing the accurate equity ownership is important both for the new investor and the existing shareholders.
For the existing shareholders, the accurate equity figure ensures transparency regarding their stake in the company.
And, for new shareholders, this figure provides insight into the company's growth and current capital structure.
Not being well informed about post-money valuation before conducting it is nothing short of flying blind. And this can get in the way of high-impact company decisions.
Post-money valuation can have company-wide impacts on performance and budgets.
Managing valuation, cap tables, and individual ESOPs of employees can be tricky.
If you’re tired of updating your financial data in spreadsheets and emails and are ready for a streamlined post-money valuation visualization, a cloud-based equity and cap table management platform is all you need to visualize key financials and make informed decisions for your company.
All the best!
Vega Equity offers companies an effective, intuitive, and paperless platform for managing equity. It provides accurate cap table management, customized user experiences, and precise information. Additionally, it assists in measuring KPIs, analyzing data, and tracking performance towards goals.