If you’re thinking of creating a startup, or have one already, post-money valuation is a concept that you need to understand. Throughout a startup’s life, business owners and founders often wonder what the value of their company is. Each phase that a business goes through has its own valuation methods, and as the business matures, its valuation can change dramatically.
One period in the life-cycle of a business is the post-money period. This is the period of time right after your business accepts investment funds from either angel investors or venture capitalists. Note, though, if you never accept outside money as an investment in your business, you’ll never have a post-money period. If that’s the case, you’ll need to rely on other valuation methods to determine the worth of your business.
Valuation can be tricky, but in general, post-money valuation is based on the amount of money you raise and the equity you give in exchange for it. Any prior valuations of your business may not necessarily matter once you accept outside funds from investors. For example, you may think your business is worth $1 million before accepting any investment. After the investment, the new value on your company could be less than $1 million, the same, or more than $1 million.
Every business’ valuation is unique. Your business may have a special situation that needs extra attention during a post-money valuation. But as a basic starting point, to determine your business’s post money valuation, divide the amount of money you raise by the percentage of equity you give to investors. For example, if you raise $250,000 from investors and you give them 10% of the business, the post-money valuation is $250,000 divided by 0.1, or $2.5 million. If you raise that same amount of money and give the investor 50% of the business, the post-money value is $250,000 divided by 0.5, or $500,000.
Always keep post-money valuation in mind as you work to raise funds from outside investors. In the long run, it can help you make smarter business investment decisions.