Entrepreneurs and executives raising capital for their companies often speak of the firm's value as being "pre-money" or "post-money." The "money" in these expressions belongs to outside investors. A pre-money valuation is what the company is worth before investors put money into it. A post-money valuation is what the firm is worth after investors commit.
How It Works
Say an entrepreneur's company has a value of $2 million. That's a pre-money valuation -- what the company is worth, right now, before it has raised any additional capital. An investor comes along and agrees to put $200,000 into the business. The company, previously worth $2 million, is adding $200,000 worth of capital, so the company has a post-money valuation of $2.2 million. Pre- and post-money always refer to the current round of financing. So if the company were to go looking for more investment, it would do so with a pre-money valuation of $2.2 million.
Determining Ownership Stake
Pre- and post-money valuations define how much of the company an investor will own after he commits his money. In the previous example, the investor ends up owning $200,000 worth of a $2.2 million firm, or a little over 9 percent of the company. If the pre-money figure had been $1 million, then his $200,000 investment would have netted him a stake of about 16.7 percent. For very young companies, in fact, pre-money valuation often isn't about putting a price tag on the company at all; rather, the purpose is to define how much of the post-money company an investor will own.