What is the difference between pre-money and post-money valuation?

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Pre-money valuation is what a company is agreed to be worth immediately before an investment. Post-money valuation is that number plus the investment itself. If an investor puts $3 million into a company at a $12 million pre-money, the post-money is $15 million, and they own $3 million of a $15 million company, which is 20 percent. That single line is most of what a term sheet's headline numbers are doing. The reason the two words exist is that a valuation on its own does not say what anyone owns. A $12 million company and a $15 million company are the same company here, two sentences apart, and whether the quoted figure includes the money being invested decides whether the founders keep 80 percent or 75 percent. Founders have agreed to deals on the wrong side of that word. The only formula you need What a new investor ends up owning is their investment divided by the post-money valuation. Written out, that is the investment divided by the pre-money plus the investment. Nothing else in the document moves this number. Not the share price, not the share count, not how the lawyers describe it. Share price and share count are worth understanding anyway, because they are how the deal is actually papered, and because they are what makes the next round legible. The price per share is the pre-money valuation divided by the shares outstanding before the round. The investor's money buys that many shares at that price. The share price is the same number on both sides of the closing, which is the point of pricing a round at all: nobody's existing shares change in value at the moment of the deal, there are simply more of them. A worked example A company has 8 million shares outstanding and agrees to a $3 million round at a $12 million pre-money. The price per share is $12 million divided by 8 million shares, which is $1.50. The investor's $3 million buys 2 million shares. After the round there are 10 million shares, the investor holds 2 million of them, and 2 divided by 10 is 20 percent. That matches $3 million divided by $15 million, as it has to. If the two ever disagree, something in the table is wrong. Where founders are surprised The option pool is the usual one. Most term sheets require the pool to be a set percentage of the company after the round, and define the pre-money valuation as already including it. In practice that means the new shares for the pool are created before the investor's price is calculated, so the pool comes out of the existing holders and not out of the incoming money. A $12 million pre-money with a pool top-up inside it is a lower number than $12 million with the pool added afterward, and the term sheet will not put it that way. SAFEs and convertible notes behave the same way. They convert into shares immediately before the priced round, which means they dilute the founders rather than the new investor. A founder who raised on SAFEs and then reads a term sheet quoting a pre-money valuation is often looking at a number that already assumes those SAFEs have become stock. Pre-money and post-money also describe two kinds of SAFE, and they are not the same question. A post-money SAFE fixes the investor's percentage until the priced round, so later SAFEs dilute the founders rather than the earlier SAFE holders. Most SAFEs written since 2018 are post-money. The number that actually matters One round's percentage is not the thing to optimize. A founder who wins an extra two points at the seed and then raises four more times has traded something small for nothing in particular, because each later round multiplies against what is left rather than subtracting from it. What decides the outcome is how many rounds there are, how large each one is against the valuation it is priced at, and what the preference stack adds up to by the time the company sells. Those are the inputs worth modeling before a term sheet is signed, and they are a different calculation from the one on the first page of it.

What is the difference between pre-money and post-money valuation?

The only formula you need

A worked example

Where founders are surprised

The number that actually matters

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