But really, how to value your Startup? Imagine a situation in which an investor says that he’ll give you $30 million for 20 percent of your company. However, you believe your startup to be currently valued at less than $150 million. What is the investor really offering you?
Pre and Post Money Valuation
Investors commonly speak in terms of post-money valuation, which refers to the value of the company after a financing event. When an investor says that he’ll give you $30 million for 20 percent of the company, he means that the value of your company will grow to $150 million after funding. Post-money valuation is determined by dividing the investment ($30 million) by the ownership percentage given to the investor (20 percent).
Interestingly, pre-money valuation is calculated by working backwards, after determining the post-money valuation; you simply subtract the investment amount(s) from the startup’s post-money valuation. For instance, if the investment is $30 million and the post-money valuation is $130 million, then the pre-money valuation is $100 million.
Uprounds and Downrounds
Two common terms associated with startup valuations are upround and downround. Upround refers to a situation in which the pre-money valuation of the next financing round is higher than the post-money valuation of the previous round. Downround refers to a situation in which the pre-money valuation is lower than the post-money valuation of the prior round. Startups will, at least in theory, increasingly have Uprounds until they are ready to be sold or go public. Conversely, downrounds indicate poor financial health and can damage a startup’s reputation and dilute ownership.
Determing Startup Shareprice
With pre- and post-money valuations, one can determine the share price and how many shares to issue an investor. The share price is determined by dividing the pre-money valuation by the number of pre-money shares. Pre-money shares are the number of shares that are outstanding prior to the new investment. Returning to the running example, if the pre-money valuation is $150 million and the number of pre-money shares is 30, the share price is $5 million. Further, to determine the number of new shares issued to the investor, one divides the investment by the share price. For instance, if the investment is $100 million and the share price is $10 million, then the number of new shares issued is 10.
Of course, calculations become a bit more complicated when there are multiple investments from venture capitalists and angel investors at play. Depending on the number of investors, price points at the time of investment, and other mitigating factors, Share prices will fluctuate