What it means
The concept exists because a company's value changes the instant new money lands in its bank account. If a business is agreed to be worth $12,000,000 and an investor puts in $3,000,000, the company now holds that extra cash, so it is worth $15,000,000 immediately afterwards.
It matters because ownership percentages are calculated from the post-money figure, not the pre-money one. Dividing the investment by the post-money valuation gives the investor's stake, and getting this the wrong way round is one of the most common errors founders make when they first read a term sheet.
In practice the negotiation almost always happens on the pre-money number, with the post-money following arithmetically once the round size is agreed. Investors, though, increasingly quote a post-money figure or a post-money ownership target, because that is what determines what they actually get.
The share price mechanics follow from the same arithmetic. The price per new share is the pre-money valuation divided by the number of shares already in issue, and the investor receives however many new shares their money buys at that price.
The nuance that trips people up is the option pool. If the round requires a new employee share pool created before the money goes in, that pool comes out of the existing shareholders' stake, so the headline pre-money valuation overstates what founders are really being valued at.
In practice
Real-world examples
Example 1
A two-person analytics startup raises $500,000 from an angel syndicate at a $2,000,000 pre-money valuation. The post-money valuation is $2,500,000 and the angels own $500,000 / $2,500,000 = 20%. The founders keep 80% between them.
Example 2
A medical devices company signs a term sheet quoting a $40,000,000 post-money valuation on a $10,000,000 round. The founders initially celebrate a $40,000,000 valuation before their lawyer points out the pre-money figure is $30,000,000, and their dilution is correspondingly larger than they assumed.
Example 3
A convertible note from an earlier round converts at the same time as a new equity round closes. The company discovers that the noteholders' shares are included in the post-money share count, so the new investor's 20% target requires a larger issue of shares and more dilution for the founders.
Think of it
Imagine buying a house valued at two hundred thousand pounds and adding fifty thousand pounds for renovations. The total post-renovation value of the property is now two hundred and fifty thousand pounds.
Formula
Calculation
Post-money valuation = pre-money valuation + amount invested
Investor ownership % = amount invested / post-money valuation
A software company agrees a pre-money valuation of $12,000,000 and raises $3,000,000 from a venture fund.
Post-money valuation = $12,000,000 + $3,000,000 = $15,000,000
Investor ownership = $3,000,000 / $15,000,000 = 20%
Now check it against the share count. The founders and early employees hold 8,000,000 shares between them before the round, so the price per share is $12,000,000 / 8,000,000 = $1.50.
The investor's $3,000,000 buys $3,000,000 / $1.50 = 2,000,000 new shares. Total shares after the round are 8,000,000 + 2,000,000 = 10,000,000, and the investor holds 2,000,000 / 10,000,000 = 20%, which matches. The founders' combined stake falls from 100% to 8,000,000 / 10,000,000 = 80%.Case study
Seen in the real world
Tidewell Logistics Software is an invented company used here as an illustrative example. Its two founders had built a route-planning product to $1,400,000 of annual recurring revenue and were raising their first institutional round.
The lead investor offered $4,000,000 at a $16,000,000 post-money valuation. The founders, reading quickly, assumed the company had been valued at $16,000,000 and that they were selling a modest slice. Their adviser worked it through: the pre-money valuation was $12,000,000, the investor's stake was $4,000,000 / $16,000,000 = 25%, and the term sheet also required a 10% post-money option pool created before the round, worth $1,600,000, which came entirely out of the founders' side.
Once the pool was accounted for, the founders' effective pre-money valuation was $12,000,000 - $1,600,000 = $10,400,000, and their combined stake would fall to 65%. In this fictional case they negotiated the pool down to 7% and the round closed, but the lesson stood: the post-money number is the headline, and everything that matters to founders happens underneath it.
Watch out
Common mistakes
- Calculating investor ownership by dividing the investment by the pre-money valuation, which understates the stake being sold and overstates what founders keep.
- Hearing a post-money valuation quoted and mentally treating it as the pre-money figure, so the round looks far less dilutive than it is.
- Ignoring an option pool created before the round, which effectively reduces the founders' valuation without changing the headline number.
Questions
People also ask
Is post-money valuation the same as market value?
No, it is the value implied by the price one set of investors paid for a minority stake on specific terms, and it may be well above or below what the whole company would fetch in a sale.
Why do investors prefer to quote post-money?
Because the post-money figure directly determines their ownership percentage, whereas the pre-money figure only does so once the final round size is fixed.
Does the post-money valuation include convertible notes?
It usually does if those notes convert as part of the round, and founders should check the fully diluted share count carefully, since including them increases dilution for existing holders.