I’ve seen quite a few pitch decks now, and one thing I see quite frequently is how often the terms pre-money and post-money valuation are confused and inconsistency when expressing a valuation as a percentage. So let’s clear a few things up.
Pre-money is the current valuation of the company before the investment. Post-money is the current valuation of the company plus the capital you’ve just raised, as it makes sense you’re now worth the current valuation plus the new addition to your bank account. Basically, Post-money = pre-money + capital raise.
When expressing as a percentage, you need to talk about the post-money valuation, as the percentage you’re talking about is your investor’s position after their investment is made.
Let’s look at an example. You’re currently worth $1M and you’re trying to raise $100k. Your pre-money valuation is your valuation before any additional money is raised, so it’s $1M. Intuitively, a $100k investment at $1M pre-money valuation results in a $1.1M post-money valuation. The $100k cash invested is “new value” added to the overall valuation.
Now I’ve heard this expressed (incorrectly) as “$100k for 10%”, as founders divide the investment in to the pre-money valuation ($100k/$1M). This is wrong. If you’re using a percentage, it needs to be calculated on the post-money valuation. $100k on $1.1M expressed as a fraction is $100k/$1.1M or 0.1/1.1 which equals 9.09%. So the correct way of expressing this would be “$100k for 9.09%” (which doesn’t sound as “neat”).
My preference when talking to investors is to leave out the percentage entirely. If you fix on the percentage, when the conversation turns to valuation you’ll invariably end up raising less on a lower valuation to achieve the same dilution (%). I prefer fixing the amount you’re raising (as it’s to be used by the company as per your budget) and then negotiate what the valuation is.