Pre-money Business Valuation

Definition

Business valuation conducted before the injection of capital from outsite equity investors.

What It Means

Equity investors, such as angels and venture capitalists, provide investment capital in exchange for a share of business ownership. A key question addressed by the pre-money business valuation is this:

What percentage of business ownership interest do the outside investors get for a given amount of money?

For example, assume that you determine that your business is worth $1,000,000 before the investment round. Let’s say that the investors offer $500,000. Based on your $1,000,000 pre-money business valuation, you will give up a third of the ownership interest in your business to raise this $500,000.

The company value after the investment has been made is called the post-money valuation. The pre-money valuation is the difference between the post-money value and the investment.

In the above example the post-money valuation is $1,500,000 which is the sum of the company’s pre-money value of $1,000,000 and the investment of $500,000.

Business owners are well advised to determine what the business is worth before accepting the terms of outside investment. A key consideration is whether you retain the controlling ownership interest after the investment round.

If not, you may end up with an illiquid investment called minority business ownership interest, whose value drops due to discounts for lack of control and marketability.

See Also