Pre-Money Valuation
What the investor and the company agree the business is worth immediately before the new money goes in. Divided by the fully diluted share count it is struck over, it gives the price per share for the round, which is why the fight is over what that count includes: the converting notes, and above all the option pool.
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Why Pre-Money Valuation matters in interviews
Pre-money is the number founders remember and the number that matters least, and interviewers use it to check whether a candidate can get from a headline valuation to a price per share and a percentage. The question underneath is always the same: struck over what.
How it works in practice
Pre-money plus new money is post-money; the investor’s stake is new money divided by post-money. A $3m cheque at a $12m pre-money is a $15m post-money and a 20% stake. That part is arithmetic.
The price per share is where the judgement sits: pre-money divided by the fully diluted share count immediately before the round. Whether that count includes the option pool increase the investor is asking for is the single most valuable question in a seed negotiation. If it does, the pool comes out of the founders’ valuation; if it does not, the investor is diluted by the pool alongside everyone else. Both are called "a $12m pre", and they are not the same deal.
A pre-money is also what a SAFE’s cap is compared against. A round priced below the cap converts the SAFE at the round price, with the discount if there is one; a round priced above it converts at the cap. So a founder raising a priced round after a stack of SAFEs at a $10m cap is choosing, with the pre-money, how much of the company those SAFEs take.
What candidates get wrong
- Confusing pre and post in a percentage. Stake is cheque over post-money, never over pre-money.
- Accepting "in the pre" without pricing it. A 10% post-money pool in the pre on a $15m post-money is $1.5m off the effective pre-money.
- Comparing pre-money valuations across rounds without the share count. A higher pre-money with a bigger pool can be a lower price per share.
Pre-Money Valuation: frequently asked questions
What is a pre-money valuation?
The value an investor and a company agree the business has immediately before new money is invested. Adding the money raised gives the post-money valuation, and dividing the pre-money by the fully diluted share count it is struck over gives the price per share for the round. Whether that share count includes the option pool increase decides how much of the headline valuation the founders actually receive.
How does the option pool affect the pre-money valuation?
When the term sheet puts the pool in the pre-money, the pool increase is added to the share count the pre-money is divided over, so the price per share falls and the pool is paid for by the founders and earlier investors rather than by the new money. The effective pre-money is the headline less the value of the pool top-up: a $12m headline with a $1.5m pool top-up is a $10.5m valuation of what existed before the round.
Practise it
Take a company from founding through a SAFE and a priced seed round. Set the cap, the pre-money and the option pool, watch the price per share and every holder’s stake move, then check your own arithmetic against the table.
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