Four, more complexity between “pre-money” and “post-money”
Imagine a company that has previously raised a $100,000 convertible note whose terms require it to convert into equity if the company raises $500,000 of equity capital. Now it raises $500,000 on a $2 million pre-money valuation. What is the post-money valuation?
Per the last post, one would imagine $2M pre-money + $500k of money = $2.5M post money valuation, with the new investors owning 20% of the company ($500k/$2.5M). Right? No.
When a deal is done, there is often more complexity than simply “new money”. In this case, the conversion of the convertible note into equity; other times, the creation of an option pool for future employees.
To account for these complications, we actually calculate as follows:
- Pre-money valuation = current number of shares multiplied by proposed share price
- Post-money valuation = post-transaction number of shares multiplied by proposed share price