'Pre-money valuation' is vital

Sometimes it is the first issue on the agenda when it comes to negotiating an investment in a startup or emerging company, and sometimes it's the last. No matter when it comes up in the process, there is no denying the overarching importance of the infamous "pre-money valuation" of the company.

Some may need a quick primer of valuation of a company raising a round of financing. Asking the question "What is the valuation?" is slightly off-base. It is more important to break it down and ask either "what is the 'pre-money' or 'post-money' valuation?"

Pre-money valuation as used in the midst of raising money for a company means the value of the company just prior to taking in investment money. It can be expressed as a total company valuation or a per-share or per-unit valuation.

For example, if you have 10 million outstanding shares of your company and you want to sell 1 million more shares at $0.10 (10 cents) each, then you are saying that the 10 million shares are worth $1 million on a pre-money basis. This is calculated by multiplying the $0.10 per share by the 10 million pre-money outstanding shares. Thus, the pre-money valuation of the company is $1 million.

In the example above, the "post-money" valuation would be the pre-money valuation times the total value of the money raised in the round, or $1

million plus $100,000, or $1.1 million.

Some simple formulae are:

Pre-Money Valuation = Outstanding Shares x Share Price

Post-Money Valuation = Pre-Money Valuation + Amount Raised

An entrepreneur seeking funds from investors with some degree of sophistication will face the question, "What is your pre-money valuation?" This is a pivotal moment in the negotiation.

Almost more than anywhere in our free enterprise system, the negotiation for early-stage investment is Wild West capitalism at its finest. It's highly subject to negotiation within the framework of the local economy and customs.