2018-03-27 07:43:36Finance and AccountingEnglishLearn what a pre-money valuation is and why it's an important figure for anyone starting a business to calculate. See ways in which you can...https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2018/03/Start-Up-Entrepreneurs-Show-An-Investor-A-Pre-Money-Valuation-Report.jpgWhat Is a Pre-Money Valuation?

What Is a Pre-Money Valuation?

1 min read

If you are starting a business or have never accepted outside investment from angel investors or venture capitalists, it might be a good idea to figure out your company’s pre-money valuation. Pre-money valuation is the value attributed to a company before it receives any public funding or outside investment. The number is important because it may help determine how much investment is generated during a capital raising round.

Figuring out a pre-money valuation for most companies is quite a difficult task. Often times, entrepreneurs attempt to put financial projections together and then perform discounted cash flow analyses (DCF) to determine a pre-money value. This is usually time not well spent because many projections are needed to perform a DCF. Often times, an entrepreneur’s financial projections for a brand new company are very inaccurate. Thus, the DCF is usually way off from a true value and unreliable.

Angel investors, however, are extremely good at what they do and have devised many ways to determine pre-money valuation, although none of the methods are perfect. Because of this, even angel investors typically recommend using a few valuation methods and taking an average. Links to many pre-money valuation methods can be found on famous angel investor Bill Payne’s website.

One of those methods, the Dave Berkus method, is simple to implement and makes for a great starting point. For each of the following five characteristics your startup business has, add between $0 and $500,000: a quality management team, a sound idea, a working prototype, a quality board of directors, a product rollout or sales. With this method, a viable pre-money valuation for a new business is between $0 and $2.5 million.

Pre-money valuation is a great number to calculate and know going forward. If you, as a small business owner, decide to raise investor funds, you have a great idea of the true value of your business going into negotiations.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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