Post-Money Valuation

How post-money valuation works

The definition is an addition. Written in words, the post-money valuation is the pre-money valuation plus the total capital raised in the round, and a new investor's ownership is the amount that investor put in divided by the post-money valuation.

Post-money valuation = Pre-money valuation + Amount raised

Investor ownership % = Investment / Post-money valuation

Price per share = Pre-money valuation / Fully diluted pre-money shares

The third line is the bridge between the valuation and the cap table. The NVCA model term sheet defines the price per share, which it calls the Original Purchase Price, as the price determined on the basis of a fully diluted pre-money valuation, and states that the pre-money valuation includes an unallocated and uncommitted employee option pool representing a stated percentage of the fully diluted post-money capitalization.

That parenthetical is where the arithmetic stops being simple. If a new option pool is created inside the pre-money, the fully diluted pre-money share count rises, so the price per share falls even though neither the pre-money nor the post-money valuation changed. The investors' percentage is unaffected. The founders' percentage is not.

What sits inside the post-money

Three things can be in or out, and each is negotiated:

• The new option pool. Inside the pre-money under the NVCA model convention, which means the existing holders fund it.
• Converting SAFEs and notes. The NVCA model term sheet's amount raised line contemplates that the total may include amounts from the conversion of SAFEs and principal and interest on bridge notes.
• The pre-money treatment of those converting instruments. Y Combinator's Post-Money Safe User Guide describes the case where parties agree in a priced round that the pre-money valuation will not actually include converting safes or portions of the option pool, and notes the consequence: the new money receives slightly less than the headline percentage, and the effective post-money valuation ends up greater than the stated figure.

The post-money SAFE

Y Combinator's post-money safe is a separate use of the same word and a common source of confusion. The user guide explains that on a post-money safe, the ownership sold equals the investment amount divided by the valuation cap, and gives the worked case of a founder targeting a $1,000,000 raise and 15 percent ownership sold, arriving at a post-money valuation cap of about $6,700,000. It also states the limit of that framing: the post-money valuation cap is post all of the safe money, but it is not post the equity financing money, so safes are not diluted by each other but are diluted by new money raised in the priced round.

Worked example

Suppose a company with 8,000,000 fully diluted shares raises $6,000,000 at a $24,000,000 pre-money valuation, and the lead requires a refreshed option pool equal to 10 percent of the post-money fully diluted capitalization, funded out of the pre-money.

Post-money valuation is $24,000,000 plus $6,000,000, or $30,000,000. The investors' ownership is $6,000,000 divided by $30,000,000, or 20 percent. Those two figures are fixed by the addition and do not move.

Now solve for the share count. Let T be the post-money fully diluted count. New investor shares are 20 percent of T. The refreshed pool is 10 percent of T. The existing 8,000,000 shares must be the remaining 70 percent.

T = 8,000,000 / 0.70 = 11,428,571 shares

New investor shares = 0.20 x 11,428,571 = 2,285,714

Pool shares = 0.10 x 11,428,571 = 1,142,857

Price per share = $6,000,000 / 2,285,714 = $2.625

Compare with the same round and no pool refresh. Then the existing 8,000,000 shares would be 80 percent of the post-money count, T would be 10,000,000, new investor shares would be 2,000,000, and the price per share would be $6,000,000 divided by 2,000,000, or $3.00.

The post-money valuation is $30,000,000 in both cases. The investors own 20 percent in both cases. But the price per share fell from $3.00 to $2.625, a 12.5 percent reduction, and the founders went from 80 percent to 70 percent. The pool cost them ten points and cost the investors nothing. All figures are hypothetical.

Where it shows up

In the term sheet, post-money appears in the pre-money valuation clause. The NVCA model form states the price per share is set on a fully diluted pre-money valuation and names a fully diluted post-money valuation in the same sentence, so both numbers are recorded side by side.

In the stock purchase agreement and its capitalization schedule, the post-money valuation is implied rather than stated. What appears is the price per share, the number of shares sold, and a capitalization table as of immediately before and immediately after the closing.

In a post-money safe, the relevant field is the Post-Money Valuation Cap, and Y Combinator's user guide explains that this is the figure from which ownership sold is calculated by dividing the investment amount by the cap.

In a 409A valuation report, prepared to set the strike price for employee options, the post-money valuation from a recent financing is an input rather than the conclusion. The report values common stock, which sits behind the preference stack, so the per-share value it produces is typically well below the preferred price per share that the post-money valuation implies.

In a fund's quarterly report to limited partners, the post-money valuation of the most recent round is one of the standard reference points for carrying a private position at fair value. The Institutional Limited Partners Association's reporting template standardises the fund level rather than the holding: its capital account statement walks from beginning to ending net asset value through contributions, distributions, fees, expenses and accrued carried interest, and it does not prescribe how an individual position's valuation is presented.

Common mistakes

• Negotiating pre-money and ignoring the pool. A larger pool inside the pre-money lowers the price per share without changing either headline valuation, which is why founders should compare offers on post-round ownership rather than on the stated pre-money.
• Confusing a post-money SAFE cap with a post-money valuation. The cap is a ceiling on the conversion price, not a valuation of the company. Y Combinator's guide is explicit that the cap is post all safe money but not post the equity financing money.
• Adding up SAFE caps to get a valuation. Several safes at different caps produce different prices for different investors; there is no single implied company value.
• Assuming the post-money equals the sum of parts. Where the parties agree the pre-money excludes converting instruments, Y Combinator's user guide notes the effective post-money valuation will be greater than the stated one.
• Treating post-money as a market value. It is the price at which one negotiated transaction cleared, on terms that include a preference stack. The common stock behind that stack is worth less per share, which is what a 409A valuation exists to measure.

Related terms

Post-money valuation is the counterpart of pre-money-valuation and the denominator behind every dilution calculation on a cap-table. It is fixed in a term-sheet, reached through a safe or convertible-note conversion at a seed-round, and referenced again when setting option-pool sizing and the 409a-valuation that prices employee grants. The preference attached to the shares issued at that valuation is the liquidation-preference.

Frequently asked questions

What is the post-money valuation formula?

Post-money valuation equals the pre-money valuation plus the amount raised in the round. From it, a new investor's ownership is the amount invested divided by the post-money valuation. Y Combinator's Post-Money Safe User Guide gives the standard illustration: a company raising $2,000,000 at a $10,000,000 pre-money valuation is generally the same as saying it is raising $2,000,000 at a $12,000,000 post-money valuation.

What is the difference between pre-money and post-money valuation?

Timing, and nothing else. Pre-money is the valuation immediately before the company receives the investment; post-money is the valuation immediately after. The same deal can be quoted either way, and the difference between the two numbers is exactly the amount being raised.

Why do investors care more about post-money?

Because ownership comes straight out of it. Dividing the investment by the post-money valuation gives the percentage of the company purchased, with no further arithmetic. Pre-money requires an extra step and hides the effect of anything else entering the cap table at the same time.

Does the option pool affect post-money valuation?

Not the number, but it changes what the number buys. Under the NVCA model term sheet convention, the pool is created inside the pre-money valuation, so the post-money valuation and the investors' percentage stay the same while the share count rises and the price per share falls. The cost is borne entirely by the holders who were on the cap table before the round.

Is a post-money SAFE cap the same as a post-money valuation?

No. It is a cap on the price at which the safe converts. Y Combinator's guide explains that on a post-money safe the ownership sold equals the investment divided by the valuation cap, and that the cap is post all of the safe money but not post the money raised in the equity financing, so safe holders are diluted by the priced round even though they are not diluted by each other.

Is post-money valuation what the company is actually worth?

It is the price at which one negotiated transaction cleared, for a security that sits ahead of common stock. It is not an independent appraisal, and it is not what the common stock is worth per share. That figure is produced separately by a 409A valuation, which values common behind the preference stack and typically lands well below the preferred price.