Drug testing

Pre-Money vs. Post-Money Valuation

When a company decides that it must raise capital, a key question that must be answered is how much the company is worth. For example, if the business needs $500,000 to get started and/or grow, how much of the equity in that company should $500,000 command? Once this question is answered, the company will go out and try to find investors. When doing so, a key question often arises as to whether the valuation is "pre-money" or "post-money."

"Before the money" or "pre-money" and "after the money" or "post-money" denote simple concepts. However, these simple concepts can even confuse even the most sophisticated analysts at times. If a company is valued at $1 million on Day 1, then 25 percent of the company is worth $250,000. However, there may be an ambiguity. Suppose the company and the investor agree on two terms: (1) a $1 million valuation, and (2) a $250,000 equity investment. In this case, the company may offer the investor 250 shares for $250,000. Immediately there can be a disagreement. The investor may have thought that equity in the company was worth $1,000 per percentage point, in which case $250,000 gets 250 out of 1,000 shares or a 25% equity position. Conversely, the company may have believed that the investor was contributing to the enterprise which was already worth $1 million. Under this rationale, the $250,000 would give the investor 250 shares out of 1,250 shares or a 20% equity position.

The critical issue was whether the agreed value of $1 million to be assigned to the company was prior to or after the investor's contribution of cash (pre-money) or post-money.

In the above case, a pre-money valuation of $1 million and a post-money valuation of $1.25 million were equivalent. Because mixing up the terms could significantly increase the cost of capital raised, companies must be sure to understand the two metrics and agree with investors to the metric that raises them the capital at the appropriate price.

Since its inception, Growthink Business Plans has developed over 200 business plans. Growthink clients have collectively raised over $750 million in financing, launched numerous new product and service lines and gained competitive advantage and market share. Growthink has become the firm of choice for venture capital firms, angel investors, corporations and entrepreneurs in the know. For more information please visit http://www.growthink.com or download our free Business Plan Guide.

limousine chicago service
In The News:

Entrepreneurial Ongoing Education Advice

I would like to give some advice to all the... Read More

Think - Dont React

How you think, your relationship with yourself is what decides... Read More

The Boss is DEAD!

Some of us are born into families with "it", some... Read More

Venture Capital Negotiating Issues

When companies enter into negotiations with venture capital firms, there... Read More

The Heroic Entrepreneur: Profiting from Your Brilliance

If you look up the definition of hero in Webster's,... Read More

Youve Found Your Guru, Now What?

In my last article, "Follow That Guru", I told you... Read More

CHINESE TAKE-OUT: Oriental Business Principles Demystified For Online Enterprises

"The expectations of life depend upon diligence; the mechanic that... Read More

Be An Entrepreneurial Artist: Paint A Picture, then Commit It to Canvas

James had an original concept and he needed an investor.... Read More

If It Was Easy Everybody Would Do It

Q: I started my business about a year ago and... Read More

Defining a R&D Framework for Entrepreneurship and Innovation on Information Product Generation

IntroductionKnowledge is the key resource that forms the institutional basis... Read More

Seven Key Qualities of Successful Entrepreneurs

A recent poll conducted by Forbes magazine shows that majority... Read More

Raising Capital for Your Business ? How Long Does it Take?

Most companies vastly underestimate the time commitment necessary to successfully... Read More

Innovation incubator: Build it and keep it running

If your company is like the one I work for,... Read More

7 Small Business and Self Employed Law of Attraction Principles For Success

It is widely held that one of the most important... Read More

The Perfect Little Coffee Shop: Are You Afraid of Failure? Are You Letting that Failure Cripple You

Ah, coffee, the drink of choice when I want to... Read More

Profile of Women Leaders

Leadership is based on two words, "pressure and support"and that... Read More

Why Every Student Should Start a Business

With the economic downturn, students in all the major business... Read More

Used-Book Case Study

Dwight Payne and Gary Heap reside in Santa Barbara, CA,... Read More

The Entrepreneurial Difference

Who would ever have imagined that going door-to-door in my... Read More

Why I Should Go In To Business

Rohit Kochgaway was very upset with his boss for his... Read More

Corporate Espionage in Franchising

Franchising Trade Journals do not do well, because today with... Read More

Franchisor Sample Grand Opening Launch for New Franchised Outlets

It is paramount that all franchising companies work hard in... Read More

Financial Issues in Business Startup

A primary inhibitor of business start-up is that few people... Read More

Work On, Not In Your Business

Are you busy? Everyone's busy! Ask anyone they'll tell you... Read More

Getting Rich Isnt a Bad Idea

You've seen plenty of articles claiming to offer you the... Read More

led light poles led street lightings Pete's produce ..