Pre-money Valuation

The pre-money valuation is the value of a company immediately before a financing round. It forms the basis for determining what stake new investors receive for their capital. Together with the new capital, it results in the post-money valuation. In the early stage this figure rests only partly on classic valuation methods, because neither reliable earnings nor dependable forecasts exist. What matters instead are the team, market size, early signals from the market, competition for the round and simply the capital required and the founders' willingness to accept dilution.

In practice the calculation often runs backwards: the investor sets the ownership percentage it wants, the capital requirement gives the amount invested, and the valuation follows. Precise definition matters, because the pre-money figure may or may not already include the option pool and outstanding convertible instruments. If the pool is created before the round and included, it reduces existing shareholders' percentages further without changing the headline number. The figure is therefore only meaningful together with a fully diluted cap table. Founders should also bear in mind that a very high valuation is not always advantageous, because it raises expectations for the next round and increases the risk of a down round with its consequences for anti-dilution protection.

In practice, for young companies the pre-money valuation is less the result of a calculation than of a negotiation shaped by market conditions, competition for the round and the amount of capital needed. A common starting point is to work back from the investor's target stake: to acquire 20 percent for 3 million euros implies a post-money valuation of 15 million euros and therefore a pre-money valuation of 12 million euros. For convertible loans it must additionally be agreed whether conversion is based on the pre-money or the post-money valuation.