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:
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.