Pre Money, Post Money Valuation
Most of us have been listening this words on Shark tanks, Pitching competition. Let's dive into it in very simple words.
Most of us have been listening this words on Shark tanks, Pitching competition. Let's dive into it in very simple words.
Imagine you have a lemonade shop, and it’s worth $100 because of all the lemons, sugar, and cups you have. Now, that $100 is your pre-money valuation. It’s the value of your lemonade stand before someone decides to invest more money.So, pre-money is like saying, "My lemonade stand is worth $100 before anyone chips in more cash."
Now, let’s say your friend loves your lemonade stand idea and decides to invest an extra $50. After the investment, your lemonade stand is still the same, but now it's valued at $150.
Now lets understand this process with numbers as well
Original Ownership (Before Investment):
Pre-Money Valuation: $100
So, the founder (you) owns the entire $100, representing 100% equity.
Investment:
Friend invests an extra $50.
Post-Money Valuation:
Post-Money Valuation: $150 (Pre-Money Valuation + New Investment)
Equity Split Calculation:
Founder's Share :
Founder's Equity = Pre-Money Valuation / Post-Money Valuation
Founder's Equity = $100 / $150
Founder's Equity = 2/3 or 66.67%
New Investor's Share :
Investor's Equity = New Investment / Post-Money Valuation
Investor's Equity = $50 / $150
Investor's Equity = 1/3 or 33.33%
Result:
Before the new investment, the founder owns 100%.
After the new investment, the founder owns 66.67%, and the new investor owns 33.33%.