What is Post Money Valuation?
Post money valuation is the equity value of a company after it receives the cash from a round of financing it is undertaking. Since adding cash to a company’s balance sheet increases its equity value, the post money valuation will be higher than the pre money valuation because it has received additional cash.
Share Price vs. Equity Value
The post money value of a company refers to the total value of its equity, and not the individual share price. Although the equity value will be impacted by putting additional cash on the balance sheet, the individual share price will be unaffected. The example below shows how that’s the case.
Post Money Valuation Example
Below is a three-part example of how to calculate the post money valuation of a company undergoing a Series X funding round.
The company below has a pre money equity valuation of $50 million. Before the round of financing, the company has one million shares outstanding, and thus a share price of $50.00.
The company will raise $27 million of new equity at the pre money valuation of $50 million, which results in it issuing 540,000 new shares.
The company will add the $27 million of cash (assuming no transaction costs) to its pre money value of $50 million to arrive at a post money valuation of $77 million. Post-transaction, the company will have 1.54 million shares outstanding, and therefore, its share price remains $50.00.
Enterprise Value vs. Equity Value
The enterprise value of a business is the value of the entire company without considering its capital structure. A company’s enterprise value is not affected by a round of financing. While the company’s post money equity value increases by the value of cash received, the enterprise value remains constant.
When undergoing a round of financing, the original shareholders (pre-transaction) will have their proportional ownership diluted as a result of issuing new shares. Per the example above, the founders had 350,000 shares before the Series X financing, which represented 35% of the total shareholding. Post-transaction, they will still have 350,000 shares, but it will only represent 23% of the total. The value of their stake remains the same (350,000 x $50 = $17.5 million).
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Companies that are undergoing a financing round (i.e., Series X) will need to negotiate with potential investors about what the company is worth.
The most common valuation methods are:
- Discounted Cash Flow (DCF)
- Comparable Companies (aka Trading Multiples, or Public Comps)
- Precedent Transactions
To learn more about each of the above techniques, see CFI’s guide to valuation methods.
Post Money Valuation Formula
To calculate the post money valuation, use the following formula:
Post Money Value = Pre Money Value + Value of Cash Raised
Post Money Value = Pre Money Share Price x (Original Shares Outstanding + New Shares Issued)
Since the value of a company can be very subjective, and because founders often have optimistic forecasts for the company, Venture Capital (VC) firms almost always invest via preferred shares to “bridge the valuation gap.”
By investing via a preferred share (as opposed to common shares), the VC firm obtains certain advantages:
- Liquidation preference (they are paid their capital back first if the company liquidated or sold)
- Preferred dividend (they are paid a preferred return on the investment)
- Upside participation (they may get asymmetric exposure to the upside)
- Anti-dilution provisions (protection from additional dilution in future funding rounds)
Because there is incremental value in the share features above, the VC firms’ preferred shares are more valuable than common shares. In essence, the VC firm gets to purchase preferred shares at a common share price, improving its investment return profile.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: