Business enterprise value determined as the sum of its pre-money value and the investment of capital by outside equity investors.
What It Means
Outside equity financing changes the value of the company and how its ownership is shared among the investors and owners. Typically, the new investors acquire a share of the ownership interest in the firm, while the earlier investors and founders retain some part of the business ownership. How the company’s ownership is shared depends upon its value before the investment was made and the amount of the investment.
As an example, let’s say that the company was worth $1,000,000 before the investment round. The investors offer $500,000. Based on this $1,000,000 pre-money business valuation, the founder owners will have to give up a third of the ownership interest in their business to raise the $500,000.
You can also determine the post-money value of the company directly using the so-called venture capital valuation method. Assuming no other investment rounds, the value of the company is its terminal value usually calculated at some future point in time, such as an anticipated public offering or business sale. You can then establish the post-money business value as the terminal value discounted to the present time using the investor’s discount rate.
With the post-money business value thus determined, you can easily figure out how the business ownership is to be shared among the founders and the investors. The founders contribute the pre-money value, which is just the difference between the firm’s post-money value and the investment. The new investors get the share of business in proportion to their investment amount.