4 ms·
Ask HN: What's the purpose of pre- and post-money valuations
In an investment scenario, the two terms pre- and post-money valuation mean different things. The definition of these terms is clear, however I wonder what the purpose is and why the term "pre-money valuation" even exists.
Example:
A startup raises 500 000 USD giving up 50%. The pre-money valuation is 500 000 USD. The post-money valuation is 1 000 000 USD.
However, considering the meaning of the word "valuation" this is not really true, because for both the pre- and post-money valuation the true "valuation" of the company was always determined to be 1 000 000. One side merely decided to sell half of the shares for the price of their worth.
What is the purpose of pre-money valuations, given that they don't reflect the real valuation of a company?
- ealexhudson 8y agoPre-money determines the value of the business before investment; the post-money valuation takes into account the investment. Your example isn't quite right. $500k USD at 50% equity does imply a $1M pre-money valuation. However, if we're agreed that 50% of the business is worth $500k, then immediately after the investment the value of the business is 100% of the equity (which we agreed is $1M) plus new assets (we've just put $500k in). So the post-money valuation is $1.5M.