Equity management
Equity management- Fund management
Fund management - Fund managementFund management
- Fund managementFund management
Pre-money valuation is the negotiated value of a company immediately before a financing round closes. It sets the price per share the company offers to new investors and forms the basis for calculating how many shares those investors receive for their capital.
Post-money valuation is the pre-money valuation plus the new primary capital invested in the round. It reflects the company's total value immediately after the transaction closes and gives the clearest read on an investor's ownership percentage.
The core difference is timing: pre-money valuation is measured before the round, post-money valuation is measured after it. Everything else, the price per share, the ownership split, the size of the option pool, follows from that one distinction.
The standard formulas apply to a simple primary round, where a company issues new shares for cash. They become less reliable as a complete ownership model once a closing also includes pool increases, conversions, warrants, or secondary sales.
Use this equation when the post-money valuation and new primary investment are known:
Pre-money valuation = post-money valuation − new primary investment
A term sheet stating a $10 million post-money valuation for a $2 million primary investment implies a pre-money valuation of $8 million.
Founders and investors negotiate this figure after reviewing company performance, comparable transactions, market conditions, the team, intellectual property, and financing demand. The right approach depends on the company's stage and the quality of available financial data.
Investors tend to reference this figure when it moves from pricing to ownership. Use this equation for a simple primary financing:
Post-money valuation = pre-money valuation + new primary investment
An $8 million pre-money valuation plus a $2 million investment produces a $10 million post-money valuation.
This calculation tells an investor what share of the company their check buys. For a simple priced round with no simultaneous adjustments:
Investor ownership = new investment ÷ post-money valuation
Using the same figures: $2 million ÷ $10 million = 20%.
Existing holders keep 80% collectively after the round. Their share count can stay the same, but each share represents a smaller percentage once the company issues new shares to the investor.
This is the number that ends up in the share purchase agreement. The financing documents convert valuation into a price per share:
Price per share = pre-money valuation ÷ pre-financing fully diluted shares
A company with 8 million fully diluted shares and an $8 million pre-money valuation arrives at a $1.00 price per share. A $2 million investor receives 2 million new shares, bringing the fully diluted share count to 10 million immediately after the investment and a 20% stake.
Pool expansions and instrument conversions can change the denominator. The term sheet, capitalization schedule, and pro forma cap table should use identical definitions before anyone relies on the resulting percentage.
Consider two term sheets that both quote an "$8 million valuation" for the same $2 million investment. The word "pre-money" or "post-money" next to that number changes the deal significantly.
Post-money valuation = $8M + $2M = $10M
Investor ownership = $2M ÷ $10M = 20%
With 8 million fully diluted shares outstanding before the round, price per share = $8M ÷ 8M shares = $1.00. The $2 million investor receives 2 million new shares, bringing the total to 10 million shares. Existing holders keep 8 million shares, or 80% of the company.
Pre-money valuation = $8M − $2M = $6M
Investor ownership = $2M ÷ $8M = 25%
Using the same 8 million pre-financing shares, price per share = $6M ÷ 8M shares = $0.75. The $2 million investor now receives roughly 2.67 million shares, bringing the total to about 10.67 million shares. Existing holders keep their 8 million shares, but that now represents 75% of the company, not 80%.
A financing round rarely stops at agreeing on a valuation. Once the round closes, that figure turns into a real ownership split for every shareholder on the cap table, current and new.
A lower pre-money valuation gives an investor more shares for the same capital, since the price per share is lower. A higher pre-money valuation gives the investor fewer shares and leaves existing holders with a larger percentage right after closing.
Valuation negotiations determine ownership outcomes. The headline figure becomes useful only once the parties translate it into a price per share and a pro forma cap table.
Dilution describes the reduction in an existing holder's percentage once the company issues additional shares or equity-linked securities. A founder can keep the same share count and still move from 80% to 64% ownership after a new investor acquires 20% of the post-money company.
Later rounds repeat the process. The pool increases, option exercises, warrants, SAFEs, and notes can add more shares between priced rounds, so tracking only the investor's headline percentage understates the possible ownership change.
Percentage dilution differs from economic outcome. Preferred stock can carry liquidation preferences, participation rights, and anti-dilution protections. Two investors with the same percentage can hold different payout rights in a sale.
Investors often ask a company to create or expand an employee option pool as part of a financing round. The timing of that expansion determines who absorbs the resulting dilution.
Assume the company raises $2 million at an $8 million pre-money valuation. The new investor receives 20% post-money. The term sheet also requires an unallocated pool equal to 15% of the post-closing fully diluted capitalization, created before the investment.
If founders own 80% and existing investors own 20% before the transaction, the post-closing capitalization becomes:
Illustrative ownership after a 20% financing and a 15% pre-closing option pool expansion.
The pre-round holders retain 65% collectively. Their original 80-to-20 ownership split produces 52% for founders and 13% for existing investors. The investor keeps the negotiated 20% because the pool was included in the pre-money capitalization used to set the share price.
If the company creates the same 15% pool after the financing, every post-financing holder is diluted by the new pool issuance. The new investor’s 20% falls to 17%, while the pre-round holders retain 68% collectively.
Ownership under two option-pool timing assumptions for the same financing terms.
Outstanding instruments can convert at a different price than the new preferred shares. The conversion can depend on a valuation cap, a discount, accrued interest, or a most-favored-nation provision, and each term changes the share count in the pro forma cap table.
A SAFE gives an investor a contractual right to receive equity after a future trigger event. The holder receives equity only once the agreement's conversion terms apply, and SAFE structures can vary meaningfully from one document to the next, so the conversion terms are worth reading closely before signing.
A valuation cap sets a maximum company valuation for calculating the SAFE's conversion price. A discount applies a reduced price relative to the priced-round investor. When both terms appear in the same agreement, the document specifies which calculation controls.
A convertible note is debt until it converts or the company repays it. It commonly carries interest and a maturity date, a structure a SAFE does not include. At conversion, it can turn into preferred stock at the next financing round or at another agreed trigger.
The principal and any accrued interest can create additional shares at conversion. Those shares dilute founders, existing investors, and sometimes other converting holders, so the order of operations in the financing model needs to match the language in the note and term sheet.
Early rounds often rely more heavily on team experience, product progress, market opportunity, investor demand, and recent comparable financings. Later rounds can place more weight on recurring revenue, growth quality, margins, unit economics, and forecast reliability.
A few errors show up again and again in financing discussions. Most are easy to detect before signing, once someone is looking for them.
A financing valuation usually prices preferred stock sold to investors. Preferred shares can carry rights unavailable to common stock, including liquidation preferences, protective provisions, and conversion rights.
A 409A valuation estimates the fair market value of common stock for a separate purpose. IRS guidance states that a nonstatutory stock option generally needs an exercise price at least equal to the underlying stock's fair market value on the grant date to qualify for the relevant Section 409A exemption.
Treat the latest post-money valuation and a common-stock strike price as separate figures, and work with qualified legal and tax advisers, along with an independent 409A valuation provider when one is needed.
Pre-money and post-money valuation are not two separate numbers competing for attention, they are one calculation viewed from two points in time, and the gap between them decides what a founder actually keeps after a round closes. A term sheet that quotes only a headline figure without naming the convention leaves room for a five- or ten-point ownership swing, an option pool timed to land before or after closing, and SAFE conversions that shift depending on which instrument variant a company signed. None of this is abstract: it shows up in the cap table on day one and compounds through every future round, since each subsequent price builds on the ownership base the previous round set. Founders who confirm the convention, model the fully diluted share count, and account for every convertible instrument before signing carry that clarity into every negotiation that follows. Precision at this stage protects equity for years past the closing date.
Modeling a round by spreadsheet becomes difficult to audit once it combines a new share class, an option pool increase, and multiple convertible instruments. Qapita's Cap Table Management software connects financing scenarios to the equity records already on file, so a term sheet's pre-money and post-money assumptions run against the actual fully diluted capitalization before anyone signs.
Founders, finance teams, and investors work from one shared model and one updated cap table after closing.
Book a demo to model your next round with Qapita.
Yes. In a simple primary financing, post-money valuation equals pre-money valuation plus the new investment the company receives. Secondary share-sale proceeds go to the selling holder and need separate treatment in the model.
Both carry weight, for different calculations. Pre-money valuation sets the price per share. Post-money valuation shows the investor's percentage once the new capital enters the company. The pro forma cap table brings both figures together.
A higher pre-money valuation reduces immediate dilution for a fixed investment amount. It can still create financing risk if the company cannot support a higher price in its next round. Preferred-stock rights and pool requirements can also shift the economic outcome.
A pre-money SAFE cap uses a capitalization measured before the SAFE financing is fully reflected, so later instruments can shift the eventual ownership percentage. A post-money SAFE measures ownership after the SAFE money but before the new money in the priced round, an approach that leaves the SAFE-round dilution easier to estimate at signing.
The closing post-money valuation is fixed by the transaction's agreed price and new investment. A later financing can assign a lower company valuation, creating a down round. Company performance or market conditions can also reduce an informal estimate between financings.
