Pre-money and post-money valuation

What is the difference between pre-money and post-money valuation?

Pre-money valuation is what a company is worth just before new money comes in. It is the price founders and investors agree on for the business as it stands. Post-money valuation adds the new investment, so it is the value of the company the moment the round closes, and dividing the investment by it gives the new investors' ownership. Term sheets often set a target option pool alongside the pre-money figure, and a pool increase counted in the pre-money dilutes existing holders before the new money arrives. Y Combinator released a post-money version of its SAFE in 2018 so founders could calculate exactly how much of the company they had sold.

Why it matters to a revenue leader

At a venture-backed company, the valuation rests largely on the revenue story: ARR, growth rate and retention. The sales results in the months before a raise shape that story directly. A higher pre-money means less dilution for the same check, which matters to every employee holding options, including the sales team. The post-money is the bar the next round has to clear. If the company cannot grow into a higher value, the next round is flat or down, and revenue growth is the main way a company grows into it.

How to calculate it

Investors put $10 million into a company at a $30 million pre-money valuation, so the post-money valuation is $40 million and the new investors own 25%. If the term sheet also requires a larger option pool inside the pre-money, existing holders absorb that dilution too.